                                  T.C. Memo. 2016-180



                            UNITED STATES TAX COURT



                  CAREY CLAYTON MILLS, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 26790-13.                             Filed September 27, 2016.



      Carey Clayton Mills, pro se.

      Brock E. Whalen, Sheila R. Pattison, and Bryan J. Dotson, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      GOEKE, Judge: Respondent determined deficiencies in petitioner’s income

tax of $9,068 and $9,861 for 2011 and 2012 (years in issue), respectively.

Respondent also determined penalties under section 6662(a)1 for the years in


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                         -2-

[*2] issue; however, the parties have agreed petitioner is not liable for accuracy-

related penalties. After concessions, the issue for decision is whether the

allowable deduction for legal and professional services (legal fees) for 2011

should be $12,007 or $77,823. Petitioner’s amended 2011 return, which reflects

the $77,823 deduction for legal fees, requires us to consider whether a change in

accounting method from the cash receipts and disbursements method (cash

method) to the accrual method is a valid change. We hold the change in

accounting method is not valid, and thus petitioner is entitled to a deduction of

$12,007 for legal fees under the cash method.

                               FINDINGS OF FACT

      At the time the petition was filed, petitioner resided in Alaska.

      Petitioner began a for-profit activity to mine minerals (mineral mining

activity) in 2005. Petitioner formed Diversified Mining Ventures, L.L.C.

(Diversified), on January 31, 2005, pursuant to the laws of the State of Alaska,

through which he conducted his mineral mining activity. Between 2005 and 2010

petitioner accounted for gross income and expenses of his mineral mining activity

using the cash method. Petitioner reported income and expenses on Schedule C,

      1
      (...continued)
Revenue Code in effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
                                         -3-

[*3] Profit or Loss From Business, attached to his income tax returns.2 Petitioner

has not filed with respondent an application to change his method of accounting.

      On February 3, 2012, petitioner filed his 2011 income tax return (original

2011 return). He subsequently submitted an amended 2011 income tax return

(amended 2011 return), which was processed on or around May 28, 2012. On his

original 2011 return petitioner reported his business income and expenses on

Schedule C, using the cash method, and claimed a deduction for legal fees of

$12,007, reflecting the amount he paid in 2011. On his amended 2011 return he

reported that he was using the cash method although his return reflected the

accrual method of accounting for his legal fees. Petitioner cites a tax software

error for the reported use of the cash method. Petitioner claimed a deduction for

legal fees of $77,823 on his amended 2011 return, reflecting the total amount of

legal fees billed during the 2011 tax year.

      During 2011 petitioner did not maintain any formal accounting books or

records. He reported $1,525 of gross receipts in 2011 from renting out equipment.

The only record reflecting the gross receipts was the check used to pay for the




      2
        Diversified is a disregarded entity for Federal tax purposes under secs.
301.7701-2(c)(2)(i) and 301.7701-3(b)(1)(ii), Proced. & Admin. Regs. Therefore
petitioner appropriately reported his business income and expenses on Schedule C.
                                          -4-

[*4] equipment rental, which did not include any information regarding the date

petitioner became entitled to receive the rental income.

      On September 20, 2013, respondent mailed petitioner a notice of deficiency

for the years in issue. Respondent initially disallowed the deduction claimed for

legal fees for 2011. Respondent has since conceded that petitioner is entitled to a

deduction of $12,007 for legal fees. Respondent proposed adjustments to income

on Form 4549-A, Income Tax Discrepancy Adjustments, attached to the notice of

deficiency. The adjustment to petitioner’s deduction for legal fees was $12,007;

the adjustment for repairs and maintenance was $77,636. This, however, was an

error: the amounts that should have been listed are $77,823 for legal fees, and

$11,818 for repairs and maintenance, the amounts petitioner reported on the

amended 2011 return. The correction of these errors did not increase the amount

of the deficiency, and the amount left in dispute is significantly less than the

original determination.

      Petitioner timely filed a petition with this Court disputing the notice of

deficiency.
                                        -5-

[*5]                                OPINION

I. Burden of Proof

       Ordinarily, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and the taxpayers bear the burden of proving that the

Commissioner’s determinations are incorrect. Rule 142(a)(1); Welch v.

Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace,

and the taxpayers bear the burden of proving that they have met all requirements

necessary to be entitled to the claimed deductions. Rule 142(a); INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992).

       Petitioner argues that respondent introduced a new matter outside the

original notice of deficiency in raising the change in accounting method issue.

Petitioner contends that he was instructed to change his accounting method by an

Internal Revenue Service (IRS) agent and that now the burden of proof is shifted

to respondent to prove that no such instructions were issued. Here the record fully

presents the facts, and the burden of proof plays no role in the outcome. See

Estate of Bongard v. Commissioner, 124 T.C. 95, 111 (2005).

II. Change in Accounting Method

       As a general rule, taxable income shall be computed under the accounting

method by which the taxpayer regularly computes his income in keeping his
                                        -6-

[*6] books. Sec. 446(a). Once the taxpayer has adopted an accounting method, he

must secure the Commissioner’s consent before he can compute his taxable

income under a different method. Sec. 446(e).

      If the taxpayer changes the accounting method used in computing taxable

income without first obtaining consent, the Commissioner can assert section

446(e) and require the taxpayer to abandon the new method of accounting and to

report taxable income using the old method. Capital One Fin. Corp. v.

Commissioner, 130 T.C. 147, 155 (2008), aff’d, 659 F.3d 316 (4th Cir. 2011);

Sunoco, Inc. v. Commissioner, T.C. Memo. 2004-29, slip op. at 39. The question

in such a case is whether the change constitutes a change of accounting method

that is subject to section 446(e). Capital One Fin. Corp. v. Commissioner, 130

T.C. at 156; Sunoco, Inc. v. Commissioner, slip op. at 42. If the change

constitutes a change of accounting method that is subject to section 446(e), then

the taxpayer is foreclosed from making the change by section 446(e) and the

regulations promulgated thereunder without regard to whether the new method

would be proper. Capital One Fin. Corp. v. Commissioner, 130 T.C. at 156;

Sunoco, Inc. v. Commissioner, slip op. at 41-42.

      A change in the accounting method includes a change in the overall plan of

accounting for gross income or deductions or a change in the treatment of any
                                        -7-

[*7] material item used in that overall plan. Sec. 1.446-1(e)(2)(ii)(a), Income Tax

Regs. A taxpayer’s change of his overall plan of accounting from the cash method

to the accrual method is a change in accounting method. Id.; see Sunoco, Inc. v.

Commissioner, slip op. at 45. Petitioner’s purported adoption of the accrual

method of accounting for Diversified in 2011 constitutes a change in accounting

method. Petitioner started his mineral mining activity in 2005. From 2005

through 2010, he accounted for the income and expenses for Diversified by using

the cash method. According to petitioner, he adopted the accrual method as his

overall accounting method in 2011. Petitioner’s purported change of his overall

accounting method from the cash method to the accrual method constitutes a

change of accounting method for which petitioner was required to obtain to

respondent’s consent.

      Petitioner did not obtain respondent’s consent before his purported change

from the cash method to the accrual method of accounting. A taxpayer has two

means through which he can obtain the Commissioner’s consent to a change in

accounting method. Hawse v. Commissioner, T.C. Memo. 2015-99, at *14-*15;

see sec. 1.446-1(e)(3), Income Tax Regs. First, the taxpayer can file a properly

completed Form 3115, Application for Change in Accounting Method, with the

Commissioner during the taxable year for which the taxpayer desires to make the
                                         -8-

[*8] change and await an affirmative grant of consent. Capital One Fin. Corp. v.

Commissioner, 130 T.C. at 158; sec. 1.446-1(e)(3)(i), Income Tax Regs. The

Commissioner must notify the taxpayer that his request has been granted for the

Commissioner’s consent to be effective. Hawse v. Commissioner, at *23. Second,

the taxpayer can comply with the terms and conditions for obtaining consent under

any administrative procedure promulgated by the Commissioner for that purpose.

Sec. 1.446-1(e)(3)(ii), Income Tax Regs. Rev. Proc. 2011-14, 2011-4 I.R.B. 330,

and Rev. Proc. 97-27, 1997-1 C.B. 680, provide the procedures for obtaining the

Commissioner’s automatic (Rev. Proc. 2011-14) and nonautomatic (Rev. Proc. 97-

27) consent to a change in accounting method for the years at issue.

      A taxpayer is required to file a Form 3115 or application in lieu of a Form

3115 to obtain the Commissioner’s automatic consent to a change in accounting

method. Rev. Proc. 2011-14, sec. 6.02(1)(a), 2011-4 I.R.B. 330, 346. Likewise, a

taxpayer is required to file a Form 3115 to obtain the Commissioner’s

nonautomatic consent to a change in accounting method. Rev. Proc. 97-27, secs.

5.01(1)(a), 6.01, 1997-1 C.B. at 684, 685. Neither Rev. Proc. 2011-14, supra, nor

Rev. Proc. 97-27, supra, provides that oral instructions from an agent are sufficient

to confer the Commissioner’s consent. Accordingly, petitioner did not obtain the
                                         -9-

[*9] Commissioner’s consent before his purported adoption of the accrual method

for 2011.

      Under section 446(e), the Commissioner can require the taxpayer to

abandon the new accounting method and to report taxable income using the old

accounting method. Sunoco, Inc. v. Commissioner, T.C. Memo. 2004-29.

Petitioner never received permission from respondent to change his accounting

method and respondent has required petitioner to abandon his new accounting

method, the accrual method, under which petitioner’s amended 2011 return was

filed, and to report taxable income using his old accounting method, the cash

method. Under the cash method, the proper deduction for legal fees is $12,007,

not the $77,823 claimed on the amended 2011 return.

III. Conclusion

      We hold that petitioner was required to compute Diversified’s income and

expenses for the years at issue under the cash method. Accordingly, petitioner is

entitled to a $12,007 deduction for legal fees for the 2011 tax year.

      In reaching our holdings herein, we have considered all arguments the

parties made, and, to the extent not mentioned above, we conclude they are moot,

irrelevant, or without merit.
                                  -10-

[*10] To reflect the foregoing,


                                              Decision will be entered under

                                         Rule 155.
