                          T.C. Summary Opinion 2012-107


                         UNITED STATES TAX COURT



                   RICHARD GARCIA, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 16497-10S.                        Filed October 31, 2012.



      Richard Garcia, pro se.

      Priscilla A. Parrett, for respondent.



                                SUMMARY OPINION


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

provisions of section 7463 of the Internal Revenue Code in effect when the
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petition 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.

       In a notice of deficiency dated April 15, 2010 (notice), respondent determined

an $8,207 deficiency in petitioner’s 2007 Federal income tax and imposed a

$2,051.75 section 6651(a)(1) addition to tax and a $1,641.40 section 6662(a)

accuracy-related penalty. After concessions, we consider: (1) whether petitioner is

entitled to trade or business expense deductions claimed on a Schedule C, Profit or

Loss From Business, in excess of the amounts now allowed by respondent; (2)

whether the gross receipts reported on that Schedule C are overstated;2 and (3)

whether petitioner is liable for a section 6662(a) accuracy-related penalty.

                                       Background

       Some of the facts have been stipulated and are so found. At the time the

petition was filed, petitioner resided in California.




       1
      Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for the year at issue. Rule references are to the
Tax Court Rules of Practice and Procedure.
       2
        This issue, raised for the first time by petitioner at trial, was tried by consent
of the parties. See Rule 41(b).
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      During 2007 petitioner worked as a truck driver for Garcia Ready Mix,

Inc. He was paid $7,475 for doing so, and this amount is shown on a Form 1099-

MISC, Miscellaneous Income, that the company issued to petitioner.

      Also during 2007 petitioner was the sole proprietor of Rick’s Roofing,

through which he offered residential roof installation and repair services. Petitioner

did not maintain separate books of account for the business, nor did he maintain a

bank account in the name of the business. Sometimes petitioner’s customers paid

cash and sometimes they paid by check. Petitioner maintained several personal

bank accounts during 2007, but he did not deposit all business receipts into one or

the other of those accounts; more often than not, checks received from customers

were cashed at a local restaurant.

      Some business expenses paid or incurred in the operation of Rick’s Roofing

were paid by checks drawn on petitioner’s personal checking account, some

business expenses were paid by charges to personal credit card accounts, and some

were paid in cash.

      Sometimes petitioner provided a potential customer with a written cost

estimate of a prospective roof installation or repair on a form entitled “Proposal”.

Sometimes the estimate was given to the customer on a form entitled “Invoice”.

If the estimate was acceptable to the customer and the work was performed,
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sometimes the written estimate, in effect, functioned as an invoice. Sometimes

petitioner noted amounts paid for the job on the copy of the “Proposal” or “Invoice”

forms; sometimes he did not. Sometimes the amount paid for a certain job varied

from the amount estimated. One of Rick’s Roofing’s customers reported $10,485

paid to petitioner during 2007 on a Form 1099-MISC.

      Petitioner maintained in a box copies of the various “Proposal” forms,

“Invoice” forms, and other slips of paper generated in the operation of Rick’s

Roofing during 2007. The box of documents was provided to the paid income tax

return preparer who prepared petitioner’s 2007 Federal income tax return.

      Petitioner’s untimely 2007 Federal income tax return was filed on February

19, 2009 (original return). The Schedule C for Rick’s Roofing included with the

original return shows $54,360 of gross receipts, expense deductions that total

$59,049, and a net loss of $4,689. “Materials” expenses totaling $32,098 are

included in the deductions claimed on the Schedule C. The amount reported as

gross receipts includes, among other income, the amount reported on the Form

1099-MISC that Garcia Ready Mix, Inc., issued to petitioner. The net loss from

Rick’s Roofing is taken into account in the negative $4,675 reported as petitioner’s

adjusted gross income on the original return.
                                        -5-

      The deficiency determined in the notice takes into account: (1) the

disallowances of many of the deductions claimed on the Schedule C for Rick’s

Roofing; and (2) the effects upon petitioner’s 2007 Federal income tax liability of

the increase to his net earnings from self-employment caused by those

disallowances. See secs. 164(f), 1401, 1402.

      Petitioner submitted two amended returns after respondent selected the

original return for examination. Both amended returns were prepared by the same

income tax return preparer who prepared the original return, and both amended

returns show changes to items reported on the Schedule C for Rick’s Roofing

included with the original return. Neither amended return was processed by

respondent.

      The first amended return, dated October 1, 2009, includes two Schedules C,

one for Rick’s Roofing and another on which the compensation that petitioner

received from Garcia Ready Mix, Inc., is reported. As relevant here, the Schedule

C for Rick’s Roofing shows “corrected” gross receipts of $10,485 and a

“corrected” deduction for “Materials” expenses of $4,800.

      The second amended return, undated but mailed on October 21, 2010,

includes a Schedule C for Rick’s Roofing. This Schedule C shows “corrected”

gross receipts of $24,860 and a “corrected” deduction for “Materials” expenses of
                                         -6-

$12,895. As with the Schedule C included with the original return, the amount

shown for gross receipts on the Schedule C included with the second amended

return apparently includes the compensation that petitioner received from Garcia

Ready Mix, Inc. The services that petitioner provided to Garcia Ready Mix, Inc.,

are unrelated to the business of Rick’s Roofing.

                                     Discussion

I. Rick’s Roofing Deductions

      As we have observed in countless opinions, deductions are a matter of

legislative grace, and the taxpayer bears the burden of proof to establish

entitlement to any claimed deduction.3 Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934). A taxpayer claiming a deduction on a Federal income tax

return must demonstrate that the deduction is allowable pursuant to some statutory

provision and must further substantiate that the expense to which the deduction

relates has been paid or incurred. Sec. 6001; Hradesky v. Commissioner, 65 T.C.

87, 90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v.

Commissioner, 43 T.C. 824, 831-832 (1965); sec. 1.6001-1(a), Income Tax Regs.




      3
      Petitioner does not claim that the provisions of sec. 7491(a) are applicable,
and we proceed as though they are not.
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      The parties have reached agreement with respect to all deductions attributable

to Rick’s Roofing with the exception of the deduction claimed for materials

expense. According to petitioner, he is entitled to the materials expense deduction,

that is, $32,098, as claimed on the Schedule C included with the original return

because the expense relates to the trade or business of Rick’s Roofing. See sec.

162. According to respondent, petitioner is entitled to a deduction of $7,014 for

materials expenses. Respondent’s amount follows a review of numerous receipts

for various materials submitted to respondent’s counsel before trial. The amount

takes into account all receipts for materials that reasonably could be connected to a

roofing business, even though petitioner did not necessarily associate a particular

receipt with a particular job. Receipts showing sales to a purchaser other than

petitioner, receipts showing purchases charged to a credit card account other than

petitioner’s, and receipts showing purchases for items petitioner acknowledged to

be personal are not taken into account in respondent’s analysis of an allowable

deduction for materials expenses.

      At trial petitioner maintained his entitlement to a deduction for materials

expenses in the amount claimed on his original return even though amounts shown

on the amended returns for that deduction were substantially less. Under the

circumstances and in the absence of any bookkeeping system then in place for
                                         -8-

Rick’s Roofing, we have little confidence that petitioner could accurately compute

the amount of the deduction for materials expenses to which he might be entitled.

After careful review of the evidence submitted, we have far more confidence in the

allowable deduction respondent proposed. Petitioner has failed to establish that he

is entitled to a deduction for materials expenses in excess of that amount.

II. Gross Receipts for Rick’s Roofing

      According to petitioner, the amount reported as gross receipts on the

Schedule C attached to the original return includes amounts shown not only on

invoices, but on proposals as well. According to petitioner, both types of

documents were included in the box that he provided to his return preparer, and

according to petitioner, she mistakenly totaled the amounts in the computation of

gross receipts shown on the Schedule C included with the original return. Petitioner

explained that he did not become aware of the mistake until after the notice was

issued and the submissions of the amended returns were his attempts to correct it.

      We have little confidence that the proper amount of gross receipts for Rick’s

Roofing can now be computed. Petitioner’s records certainly do not allow for an

accurate computation; the amounts shown on the three Schedules C included in the

record (at least one that inappropriately includes the income shown on the Form
                                         -9-

1099-MISC, from Garcia Ready Mix, Inc.)4 are not consistent, much less certain;

and petitioner’s failure to deposit all business receipts into one of his bank accounts

hardly supports his claim that gross receipts shown on the Schedule C included with

the original return are overstated. Furthermore, evidence suggesting an

overstatement of gross receipts attributable to one customer is offset by inferences

of unreported receipts raised from the combination of his failure to keep any books

of account for the business and his practice of cashing customer checks at a local

restaurant rather than depositing the checks into one of his bank accounts.

      A taxpayer claiming that income reported on a Federal income tax return has

been overstated has the burden to prove that claim. See Bell v. Commissioner, T.C.

Memo. 2011-296. This petitioner has failed to do.

III. Accuracy-Related Penalty

      Section 6662(a) imposes a penalty of 20% of the portion of an

underpayment of tax attributable to the taxpayer’s negligence, disregard of rules or

regulations, or substantial understatement of income tax. Sec. 6662(a) and (b)(1)



      4
       Following the parties’ lead, we ignore the Federal income tax implications of
incorrectly reporting the income from the Form 1099-MISC, from Garcia Ready
Mix, Inc., on the Schedule C for Rick’s Roofing.
                                        - 10 -

and (2).5 “Negligence” includes any failure to make a reasonable attempt to comply

with the provisions of the Code, including any failure to keep adequate books and

records or to substantiate items properly. See sec. 6662(c); sec. 1.6662-3(b)(1),

Income Tax Regs. A “substantial understatement” includes an understatement of

income tax that exceeds the greater of 10% of the tax required to be shown on the

return or $5,000. See sec. 6662(d)(1)(A); sec. 1.6662-4(b), Income Tax Regs.

      Respondent bears the burden of production with respect to the imposition of

the section 6662(a) accuracy-related penalty. See sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). On his original return petitioner

claimed deductions for expenses that he is unable to substantiate. See sec. 1.6662-

3(b)(1), Income Tax Regs. Furthermore, the underpayment of tax required to be

shown on that return is a substantial understatement of income tax because the

understatement exceeds $5,000. See sec. 6662(b)(2), (d)(1). Respondent’s burden

of production under section 7491(c) has been satisfied.

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

accuracy-related penalty if the taxpayer establishes that there was reasonable cause




      5
        In this case, the deficiency, underpayment of tax, and understatement of tax
are all computed in the same manner. See secs. 6211, 6662(d)(2), 6664(a).
                                         - 11 -

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. It is petitioner’s burden to establish that he acted in good faith and that there

was reasonable cause for the underpayment. See Higbee v. Commissioner, 116

T.C. at 449; see also Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

      Under certain circumstances, a taxpayer’s reliance upon professional advice

may establish the taxpayer’s “reasonable cause” and “good faith” with respect to an

underpayment of tax if the taxpayer establishes that: (1) the professional was

provided with complete and accurate information, (2) an incorrect return was a

result of the preparer’s mistakes, and (3) the taxpayer demonstrates good-faith

reliance on a competent professional. See Estate of Goldman v. Commissioner, 112

T.C. 317, 324 (1999), aff’d without published opinion sub nom. Schutter v.

Commissioner, 242 F.3d 390 (10th Cir. 2000); see also Neonatology Assocs., P.A.

v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

      Although petitioner’s return was prepared by a paid income tax return

preparer, petitioner has failed to establish that he provided his return preparer with
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complete and accurate information with respect to the deductions claimed on the

Schedule C included with the original return. Accordingly and otherwise, petitioner

failed to establish that he acted in good faith with respect to any portion of the

underpayment of tax and that any portion of the underpayment is due to reasonable

cause. Petitioner is liable for the section 6662(a) accuracy-related penalty, and

respondent’s imposition of that penalty is sustained.

      To reflect the foregoing,


                                                        Decision will be entered

                                                  under Rule 155.
