                         T.C. Summary Opinion 2012-41


                         UNITED STATES TAX COURT



     MAYER WEINBERGER AND SARAH WEINBERGER, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23544-10S.                         Filed May 2, 2012.



      Ronald Jay Cohen, for petitioners.

      Rose E. Gole and Michael J. De Matos, 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
                                          -2-

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 deficiencies in, additions to tax on, and accuracy-

related penalties with respect to petitioners’ Federal income taxes as follows:

                                  Addition to tax     Accuracy-related penalty
  Year        Deficiency          Sec. 6651(a)(1)          Sec. 6662(a)

  2004        $9,652              $1,026.00                  $1,930.40
  2005         9,564               1,003.50                   1,912.80
  2006         9,419                 978.50                   1,883.80
  2007         9,234                 569.40                   1,846.80
  2008         8,716                  --                      1,743.20

        After concessions by respondent,2 the issues now before the Court are as

follows:

        (1) Whether petitioners received earned income in the amounts reported for

each year in issue for purposes of the additional child tax credit;

        (2) whether petitioners are entitled to the dependent care credit for each year

in issue;

        1
         Unless otherwise indicated, all subsequent 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.
        2
       Respondent concedes that petitioners are entitled to six child dependency
exemption deductions and the child tax credit for each year in issue.
                                         -3-

      (3) whether petitioners are liable for the addition to tax under section

6651(a)(1) for failure to timely file their Federal income tax returns for 2004, 2005,

2006, and 2007; and

      (4) whether petitioners are liable for the accuracy-related penalty under

section 6662(a) for negligence or disregard of rules or regulations with respect to

each year in issue.

                                     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.

Petitioners resided in Antwerp, Belgium, when the petition was filed.

      Mayer Weinberger and Sarah Weinberger were married in 1988 and have

lived together in Antwerp, Belgium, at all times relevant thereafter.

      Sometime after their marriage, Mr. Weinberger began attending a Jewish

school in Antwerp called The Friends of Satmar Kollel Antwerp Ltd. (Satmar).

Satmar is an institution where married Jewish men engage in the full-time advanced

study of the Torah, the Talmud, and the laws of Jewish life. Although some remain

for longer periods, students at Satmar typically study for two or three years. Satmar

students generally receive a stipend from the school to defray living expenses.
                                           -4-

Mr. Weinberger received such a stipend while he was a full-time student

at Satmar.

      After four years of study at Satmar, Mr. Weinberger was hired by the

principal of the school to conduct lectures for the students regarding a variety of

religious subjects involving the Jewish tradition.

      During the years in issue Mr. Weinberger continued to teach, and he received

payments from Satmar for each lecture he gave at the school. In addition, Mr.

Weinberger spent his free time engaged in rabbinical studies and became a rabbi

shortly before trial. Meanwhile, Mrs. Weinberger worked in Antwerp as a teacher

at an all-female school called Bais Rachel.

      Also during the years in issue petitioners had six dependent children who

were United States citizens and who lived with petitioners in Belgium. Petitioners

paid a child care center at Bais Rachel to care for their young children while

petitioners were teaching and lecturing at their respective schools.

      Petitioners filed joint U.S. Federal income tax returns (tax returns) for 2004,

2005, 2006, 2007, and 2008 on June 13, August 16, August 16, and September 8,

2008, and June 1, 2009, respectively.3 On each of those tax returns, petitioners



      3
          Petitioners also filed Belgian income tax returns for the years in issue.
                                         -5-

reported $48,000 of wages and claimed, inter alia, the additional child tax credit and

the dependent care credit.

      Respondent subsequently issued notices of deficiency in which he determined

that the amounts reported as wage income on petitioners’ tax returns for the years in

issue should be reclassified as “other income” because petitioners allegedly failed to

substantiate that the income constituted “earned income” within the meaning of

section 32. See Discussion infra. Furthermore, respondent disallowed, inter alia,

the additional child tax credits and dependent care credits claimed by petitioners.
                                         -6-

                                     Discussion4

A. Burden of Proof

      In general, the Commissioner’s determinations set forth in a notice of

deficiency are presumed to be correct, and the taxpayer bears the burden of proving

that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933). Moreover, credits are a matter of legislative grace, and the

taxpayer bears the burden of proving that he or she is entitled to any credit claimed.

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); Segel v. Commissioner, 89 T.C. 816, 842

(1987).



      4
          The United States and the Kingdom of Belgium signed a tax treaty in 1970,
Convention for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion With Respect to Taxes on Income, U.S.-Belg., July 9, 1970, 23 U.S.T.
2687, which was in force from Oct. 13, 1972, through Dec. 28, 2007, at which time
the current treaty, Convention for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion With Respect to Taxes on Income, U.S.-Belg., Nov.
27, 2006, Tax Treaties (CCH) para. 31,011, came into force. Because the United
States taxes its citizens on their worldwide income, a “saving clause” is included in
both tax treaties which reserves the right of the United States to tax its citizens on
the basis of the Internal Revenue Code notwithstanding the treaty provisions. See
Filler v. Commissioner, 74 T.C. 406, 410 (1980). While both treaties provide
certain exceptions to the saving clause, none are relevant here. Furthermore, the
two treaties have no bearing on any of the issues for decision as presented by the
parties in this case, and the existence of the treaties is noted here simply for
purposes of completeness.
                                         -7-

      Under section 7491(a)(1), the burden of proof with respect to any factual

issue may shift from the taxpayer to the Commissioner if the taxpayer produces

credible evidence bearing on that issue that is relevant to ascertaining the taxpayer’s

liability. However, section 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). As discussed below, petitioners

failed to fully substantiate their income and expenses and did not maintain

appropriate records. Accordingly, the burden of proof remains on petitioners. See

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

B. Additional Child Tax Credit

      Section 24(a) allows eligible taxpayers a credit for each “qualifying child”.5

Section 24(d) provides that a portion of the credit may be refundable, which portion

is commonly referred to as the additional child tax credit.

      To be eligible for the additional child tax credit in any given year a taxpayer

must have received “earned income” within the meaning of section 32. See sec.

24(d)(1)(B)(i); see also Heilman v. Commissioner, T.C. Memo. 2011-210.

Petitioners contend that the amounts Mr. Weinberger received from Satmar


      5
         Respondent concedes that all six of petitioners’ children claimed on their
returns are qualifying children for purposes of the child tax credit and the additional
child tax credit.
                                         -8-

represent wages paid for his services as a lecturer and thus constitute earned

income. Respondent argues, however, that the amounts received by Mr.

Weinberger represent educational grants and do not constitute earned income under

section 32.6 Respondent also argues that petitioners failed to substantiate the

amounts reported as wages on their tax returns. We hold that the amounts received

by petitioners, as substantiated by the record and discussed infra, constitute earned

income within the meaning of section 32.

      1. Earned Income

       The term “earned income” includes “wages, salaries, tips, and other

employee compensation” but only if the amounts of those items are includible in

gross income. Sec. 32(c)(2)(A)(i).

      At some point shortly after petitioners were married in 1988, Mr. Weinberger

became a full-time student at Satmar and received funds from the school to help

defray living expenses. Upon completing four years of study, however, he was

hired by Satmar as a lecturer, and he continued to be employed by Satmar as a

lecturer during the years in issue.


      6
         Although the notices of deficiency reclassified all of petitioners’ income,
the record demonstrates that Mrs. Weinberger received earned income from Bais
Rachel in exchange for her services as a teacher. It appears that respondent no
longer contends otherwise. Accordingly, we focus on the amounts received by Mr.
Weinberger during the years in issue.
                                         -9-

       On the whole, the record demonstrates that Mr. Weinberger was hired to

lecture and that he was compensated for each lecture given. Admittedly, Mr.

Weinberger spent time studying to become a rabbi during the years in issue, but his

rabbinical studies were conducted during his personal time. Although Mr.

Weinberger occasionally studied to prepare for his lectures, the payments he

received for each lecture were not educational grants but payments for his services.

       At trial Mr. Weinberger introduced monthly payment reports provided by

Satmar (payment reports) and a spreadsheet maintained by Satmar (spreadsheet)

that detail each lecture he performed for the school during the years in issue. Each

payment report describes, inter alia, the nature of the lesson he taught and the

number of days he lectured on a particular subject during the month. The payment

reports also clearly list the corresponding amount paid to Mr. Weinberger for each

lecture.

       In sum, and on the basis of the entire record, we are satisfied that Mr.

Weinberger was paid to provide services to Satmar as a lecturer during the years in

issue and that the payments he received from Satmar in those years represented

earned income within the meaning of section 32. Therefore, petitioners are entitled

to claim the additional child tax credit to the extent they have substantiated the
                                          - 10 -

amounts of earned income they received during each year in issue. See, e.g., sec.

6001; sec. 1.6001-1(a), Income Tax Regs.

        2. Substantiated Earned Income

        Respondent argues, in the alternative, that petitioners failed to fully

substantiate the amounts reported as earned income on their tax returns. In that

regard, and to the extent specified below, we agree with respondent.

        The payment reports from Satmar list the amount Mr. Weinberger received

for each lecture beginning with late March 2004 and ending in the first quarter of

2007. The spreadsheet from Satmar reconciles with those payment reports during

the aforementioned period. In addition, the spreadsheet includes payments Mr.

Weinberger received during the final three quarters of 2007 and the first quarter of

2008.

        The payment reports and spreadsheet, however, do not show any payments

for the period January 1 through March 22, 2004, or any payments during the final

three quarters of 2008 (missing periods). Although Mr. Weinberger contends that

he received payments from Satmar for his lectures during the missing periods, there

is no documentary evidence in the record to support such a claim. In this regard, the

Court is “not required to accept the self-serving testimony of petitioner * * * as

gospel.” Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Without further
                                         - 11 -

documentary evidence, we are unwilling to conclude that Mr. Weinberger received

any amount of income beyond what is shown on the payment reports and

spreadsheet.

      With respect to the earned income received by Mrs. Weinberger as a teacher

at Bais Rachel, petitioners likewise failed to substantiate the full amounts reported

on their tax returns for the years in issue. Petitioners have proven, however, that

Mrs. Weinberger received earned income during those years in amounts that

coincide with the amounts reported on her pay stub for 2008 and petitioners’

Belgian income tax returns.

      Therefore, we conclude that petitioners received the following aggregate

amounts of earned income:7

  Tax Year          Mayer Weinberger              Sarah Weinberger        Total

  2004              $18,428                        $8,335                 $26,763
  2005               26,145                         8,763                  34,908
  2006               26,727                        10,723                  37,450
  2007               28,605                        10,172                  38,777
  2008               10,975                        11,593                  22,568

      Overall, petitioners failed to maintain complete records of their income and

provided insufficient evidence to substantiate the full amounts claimed on their tax


      7
         All income and expense amounts have been converted from euro to U.S.
dollars using the conversion rates in the parties’ stipulation of facts and have been
rounded to the nearest dollar.
                                        - 12 -

returns. Accordingly, we are unwilling to conclude that petitioners received any

earned income beyond the amounts enumerated above.

C. Dependent Care Credit

      1. General Requirements

       Section 21 allows a credit for a percentage of “employment-related

expenses” paid.8 Employment-related expenses include expenses paid for the care

of a qualifying individual that enable the taxpayer to be gainfully employed. Sec.

21(b)(2)(ii). The term “qualifying individual” includes a dependent, as defined in

section 152(a), of the taxpayer who has yet to reach 13 years of age. Sec.

21(b)(1)(A).

      In the notices of deficiency respondent disallowed the dependent care credit

claimed by petitioners each year because they allegedly failed to establish that their

children were qualifying individuals pursuant to section 21. Respondent has since

conceded that petitioners are entitled to dependency exemption deductions with

respect to each child claimed as a qualifying individual for purposes of the



      8
         The amount of employment-related expenses that may be claimed for
purposes of the dependent care credit in any given tax year is limited to the earned
income of the lower earning spouse for that year. Sec. 21(d)(1). Because we hold
that both petitioners received earned income during each year in issue, further
substantive discussion of earned income in the dependent care credit context is
unnecessary.
                                        - 13 -

dependent care credit. Furthermore, the record indicates that those dependent

children were under the age of 13 during the years in issue, and it appears

respondent does not contend otherwise. Therefore, we conclude that petitioners’

dependent children are qualifying individuals within the meaning of section

21(b)(1)(A).

      Furthermore, petitioners have demonstrated that they were both employed

during the years in issue and their employment made it necessary for them to pay

child care expenses for their qualifying children. Thus, on the basis of the entire

record, we hold that petitioners are entitled to the dependent care credit with respect

to the substantiated amounts of expenses they paid for the care of their qualifying

children. See, e.g., sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

      2. Substantiated Employment-Related Expenses

      Petitioners provided sufficient documentary evidence to substantiate a portion

of the employment-related expenses they paid during each year. On the basis of that

documentation, we are satisfied that petitioners paid the following amounts of

employment-related expenses in regard to their qualifying children for each

respective year in issue:
                                        - 14 -

                          Year         Amount of Expenses

                          2004                   $3,899
                          2005                    3,410
                          2006                    3,801
                          2007                    4,206
                          2008                    4,009

      As a general rule, if, in the absence of required records, a taxpayer provides

sufficient evidence that the taxpayer has paid an expense, but the taxpayer is unable

to adequately substantiate the amount, the Court may estimate the amount of such

expense. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). In order

for the Court to estimate the amount of an expense, however, we must have some

basis upon which an estimate may be made. Vanicek v. Commissioner, 85 T.C.

731, 743 (1985). Without such a basis, any allowance would amount to unguided

largesse. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957). Although

Mr. Weinberger claimed he and his wife paid employment-related expenses beyond

the amounts they were able to adequately substantiate, they provided no

documentary evidence of further payments and no basis upon which a greater

allowance may be justified. Accordingly, we are unwilling to conclude that

petitioners paid employment-related expenses beyond the substantiated amounts

listed above.
                                            - 15 -

D. Additions to Tax

      Section 6651(a)(1) imposes an addition to tax for failure to file a return by its

due date. The addition equals 5% of the amount required to be shown as tax on the

return for each month or fraction thereof that the return is late, not to exceed 25% in

the aggregate.

      Section 7491(c) generally provides that the Commissioner bears the burden of

production with respect to the liability of an individual for any penalty or addition to

tax. The Commissioner may meet his burden of production by coming forward with

sufficient evidence indicating that it is appropriate to impose the relevant penalty or

addition to tax. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Respondent

has proven, and has therefore discharged his burden of production under section

7491(c), that petitioners’ 2004, 2005, 2006, and 2007 tax returns were not received

and filed by their respective due dates.9

      “A failure to file a tax return on the date prescribed leads to a mandatory

penalty unless the taxpayer shows that such failure was due to reasonable cause and

not due to willful neglect.” McMahan v. Commissioner, 114 F.3d 366, 368 (2d Cir.

1997), aff’g T.C. Memo. 1995-547. A showing of reasonable cause requires a

taxpayer to show that he or she exercised “ordinary business care and prudence”


      9
          Petitioners timely filed their 2008 tax return.
                                         - 16 -

but was nevertheless unable to file the return within the prescribed time. United

States v. Boyle, 469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced. &

Admin. Regs.

       Petitioners have failed to offer persuasive evidence to establish that the late

filing of their 2004, 2005, 2006, and 2007 returns was due to reasonable cause as,

for example, the fact that they worked long hours and cared for many children is

insufficient to relieve them from liability under section 6651(a)(1). See Howe v.

Commissioner, T.C. Memo. 2000-291. Accordingly, we hold that petitioners are

liable for the addition to tax under section 6651(a)(1) for 2004, 2005, 2006, and

2007 to the extent applicable as a result of the parties’ computations under Rule

155.

E. Accuracy-Related Penalties

       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.
                                         - 17 -

        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 decision as to whether a 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.

        As a general rule, the duty of filing accurate tax returns cannot be avoided by

placing responsibility on an agent. See Metra Chem Corp. v. Commissioner, 88

T.C. 654, 662 (1987); Pritchett v. Commissioner, 63 T.C. 149, 174 (1974).

However, a taxpayer may avoid the accuracy-related penalty by showing that his or

her reliance on the advice of a professional, such as a commercial tax return

preparer, was reasonable and in good faith. Sec. 1.6664-4(b)(1), Income Tax Regs.

Specifically, the taxpayer must establish that (1) the preparer was a competent

professional, (2) the taxpayer provided accurate and necessary information to the

preparer, and (3) the taxpayer actually relied in good faith on the preparer’s

judgment. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99

(2000), aff’d, 299 F.3d 221 (3d Cir. 2002); Ma-Tran Corp. v. Commissioner, 70

T.C. 158, 173 (1978). Blind reliance on a tax return preparer, however, is not a
                                         - 18 -

defense; rather, the taxpayer is generally required to review the tax return before

signing and filing it. Bronson v. Commissioner, T.C. Memo. 2002-260; Osborne v.

Commissioner, T.C. Memo. 2002-11; Bilzerian v. Commissioner, T.C. Memo.

2001-187.

      The record establishes that petitioners failed to maintain adequate records and

properly substantiate their income and expenses. See sec. 7491(c); sec. 1.6662-

3(b)(1), Income Tax Regs. Thus, we turn to whether petitioners acted with

reasonable cause and in good faith.

      Mr. Weinberger had little to say at trial with respect to petitioners’ failure to

maintain records and substantiate their income and child care expenses, and Mrs.

Weinberger did not testify. Mr. Weinberger simply explained that his wife was

responsible for the couple’s United States and Belgian tax reporting. In that respect

he testified, albeit vaguely, that his wife consulted a commercial tax return preparer

based in Israel called U.S. Benefits Group (U.S. Benefits), which allegedly prepared

the couple’s tax returns for the years in issue. Each of petitioners’ tax returns for

those years, however, includes the typewritten statement “self-prepared” and was

not signed by a tax return preparer. Moreover, there is no documentary evidence in
                                         - 19 -

the record to suggest that petitioners relied on a tax return preparer named U.S.

Benefits, or any tax return preparer for that matter.

      Even if we assume, arguendo, that petitioners hired a commercial tax return

preparer, there is no evidence that the preparer was a competent professional, that

complete and correct information was given to the preparer, or that petitioners

reviewed their returns for accuracy. Mr. Weinberger demonstrated at trial that he

had little knowledge regarding whether complete and accurate documents were

provided to U.S. Benefits and was unfamiliar with the tax returns themselves.

Furthermore, petitioners never called their alleged tax return preparer as a witness.

See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),

aff’d, 162 F.2d 513 (10th Cir. 1947).

      Mr. Weinberger testified that he and his wife no longer seek the services of

U.S. Benefits and have become skeptical of the company’s business practices.10 If

they did, in fact, hire U.S. Benefits to prepare their tax returns, we question whether

petitioners did so in good faith. Moreover, regardless of whether they hired U.S.

Benefits or not, we are skeptical whether petitioners performed even a cursory


      10
        Although not entirely clear from the record, it appears that U.S. Benefits
promised its clients refundable tax credits from the U.S. Government and charged a
10% commission on any refund its clients received.
                                         - 20 -

review of their tax returns to confirm the accuracy of the information reported

therein.

      In sum, petitioners have not met their burden of persuasion with respect to

reasonable cause and good faith. See Higbee v. Commissioner, 116 T.C. at 446-

447. Accordingly, petitioners are liable for the accuracy-related penalty under

section 6662(a) for each year in issue to the extent the penalties are applicable as a

result of the parties’ computations under Rule 155.

                                      Conclusion

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

extent not addressed herein, we conclude that those arguments are irrelevant, moot,

or meritless.

      To give effect to the foregoing,


                                                        Decision will be entered

                                                  under Rule 155.
