                          T.C. Summary Opinion 2013-60



                         UNITED STATES TAX COURT



      RICKY R. WILLIAMS AND PAMELA D. WILLIAMS, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 8499-11S.                         Filed July 22, 2013.



      Ricky R. Williams and Pamela D. Williams, pro sese.

      L. Katrine Shelton, for respondent.



                              SUMMARY OPINION


      PANUTHOS, Chief Special Trial Judge: This case was heard pursuant to

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

petition was filed. 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
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for any other case. Unless otherwise indicated, 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.

      In a notice of deficiency dated January 6, 2011, respondent determined a

deficiency in petitioners’ Federal income tax of $24,973 and a section 6662(a)

accuracy-related penalty of $4,994 for the 2007 tax year. After concessions,1 the

issues for decision are: (1) whether petitioners may exclude a portion of their

income as a parsonage or rental allowance pursuant to section 107(2); and (2)

whether petitioners are liable for the accuracy-related penalty under section

6662(a).

                                    Background

      Some of the facts have been stipulated, and we incorporate the stipulation

and the accompanying exhibits by this reference. Petitioners resided in California

when their petition was filed.


      1
        Petitioners neither addressed at trial nor provided any evidence to support
the deductions claimed on Schedule A, Itemized Deductions, and Schedule C,
Profit or Loss From Business, that respondent disallowed for tax year 2007.
Accordingly, those amounts are deemed conceded by petitioners. See Rule
149(b). Further, petitioners neither addressed at trial nor provided any evidence to
prove that they did not omit Schedule C income, and this issue is likewise deemed
conceded. See id.; see also Roat v. Commissioner, 847 F.2d 1379, 1383 (9th Cir.
1988).
                                        -3-

      Ricky R. Williams (petitioner) is an ordained minister with a master’s in

divinity. He entered into an employment agreement (agreement) with the St. John

Missionary Baptist Church (church) in September 2005 under which he became

the church’s permanent pastor. Under the agreement, petitioner received a starting

salary of $80,000 per year. The agreement specified that the church would

provide petitioner with a $500 housing allowance for six months from the date

petitioner signed the agreement. That six-month period could be extended with a

majority vote of approval of the church’s Deacon Ministry. The agreement was

otherwise silent with respect to a housing allowance.

      Petitioners timely filed a joint Federal income tax return for tax year 2007.

Petitioners reported Mrs. Williams’ income from the Young Men’s Christian

Association as wages on their return. The church paid petitioner as a contract

worker. Consistent with this, petitioner reported his income on Schedule C.

Petitioners reported $85,077 in gross receipts on the Schedule C attached to their

return and deducted $82,076 in expenses.

      The notice of deficiency determined that petitioners had unreported

Schedule C gross receipts or sales of $18,256 and disallowed the following

deductions for lack of substantiation: (1) Schedule C deductions of $29,989 for

business use of home, $14,457 for supplies, and $13,678 for car and truck
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expenses and (2) Schedule A deductions of $2,229 for cash contributions. The

notice of deficiency also determined a section 6662(a) penalty of $4,994.

      On April 11, 2011, petitioners filed the petition, asserting that they had

supporting documentation for the amounts reported on their 2007 return. At some

point, petitioners submitted to respondent an amended Schedule C, which differed

from the Schedule C filed with their return as follows:

                                    Schedule C

              Income                        Original                Amended
 Gross receipts or sales                    $85,077                 $101,733
 Returns and allowances                        ---                     33,126
 Gross income                                 85,077                   68,607

             Expense                        Original                Amended
 Car and truck                              $13,678                  $8,514
 Depreciation                                  2,230                   3,620
 Legal and professional services               1,506                   1,000
 Supplies                                     14,457                   5,185
 Travel                                        8,935                   8,863
 Meals and entertainment                       4,829                   1,155
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 Utilities                                    6,452                     ---
 Business use of home                         29,989                    ---
 Other expenses1                               ---                    29,355

      1
       The $29,355 of “other expenses” on the amended Schedule C consists of
$18,256 for direct reimbursement, $1,652 for dry cleaning, $53 for equipment
purchase, $1,095 for furniture purchase, $1,065 for health care, $492 for Internet,
$1,440 for parking and tolls, and $5,302 for other expenses of postage,
professional services, repairs and maintenance, robes, and telephone.

The adjustments in the notice of deficiency are based on petitioners’ original

Schedule C. At trial petitioners did not dispute the adjustments in the notice of

deficiency but instead asserted that the $33,126 claimed as “returns and

allowances” on the amended Schedule C was a parsonage allowance.

                                    Discussion

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

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

these determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). Pursuant to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances. Petitioners did not allege

that section 7491(a) applies. See sec. 7491(a)(2)(A) and (B). Therefore,

petitioners bear the burden of proof. See Rule 142(a).
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I. Parsonage Allowance

      Compensation for services is generally included in gross income. Sec.

61(a)(1). Section 107(2) provides that the gross income of a minister does not

include “the rental allowance paid to him as part of his compensation, to the extent

used by him to rent or provide a home and to the extent such allowance does not

exceed the fair rental value of the home, including furnishings and appurtenances

such as a garage, plus the cost of utilities.” As a prerequisite for this exclusion,

the taxpayer must establish that there was a designation of the rental allowance

pursuant to official church action before payment. Sec. 1.107-1(b), Income Tax

Regs. The regulations state in pertinent part:

      The term “rental allowance” means an amount paid to a minister to
      rent or otherwise provide a home if such amount is designated as
      rental allowance pursuant to official action taken * * * in advance of
      such payment by the employing church or other qualified
      organization when paid after December 31, 1957. The designation of
      an amount as rental allowance may be evidenced in an employment
      contract, in minutes of or in a resolution by a church or other
      qualified organization or in its budget, or in any other appropriate
      instrument evidencing such official action. The designation referred
      to in this paragraph is a sufficient designation if it permits a payment
      or a part thereof to be identified as a payment of rental allowance as
      distinguished from salary or other remuneration.

      Respondent does not contest petitioner’s status as a “minister” under section

107(2); rather, respondent argues that the claimed parsonage allowances were not
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properly designated in accordance with the applicable regulations. Petitioners

bear the burden of proving that the amounts at issue were properly designated as a

rental allowance by official church action before payment. See Rule 142(a).

      The employment agreement that petitioner entered into with the church in

September 2005 provides that the church would assist petitioner with a $500 per

month housing allowance for six months from the date petitioner signed the

agreement but does not designate any other amount as a rental allowance.

Petitioner did not assert that the six-month period was extended. Petitioner

provided a purported second employment agreement at trial. Although the second

employment agreement is dated 2005, it was signed by petitioner and the church in

2012. Petitioner asserts that the second agreement was intended to clarify the

original employment agreement because the original agreement was a “generic-

type layout contract” between petitioner and the church in which “some of the

stuff * * * had not been defined”. The second employment agreement discusses a

parsonage allowance and provides that “Parsonage allowance shall include all

cost[s] associated with facilitating a proper living facilities [sic] for the Employee

and his family. In short these costs shall include but not [be] limited to: Monthly

rental or Mortgage costs, Gardening, Cable TV, Internet Service Costs, Security

System Maintenance, Repair[s] and Maintenance, Utilities, Etc.”
                                        -8-

      The original employment agreement does not designate a rental allowance,

and the second employment agreement was executed in 2012 and therefore could

not designate a rental allowance before payment in 2007. Petitioners have

therefore not established that the amounts at issue were properly designated as a

rental allowance by official church action before payment. See sec. 1.107-1(b),

Income Tax Regs. Accordingly, petitioners have not established that petitioner is

entitled to a parsonage allowance. See Boyer v. Commissioner, 69 T.C. 521, 533

(1977); Eden v. Commissioner, 41 T.C. 605, 607 (1964); Logie v. Commissioner,

T.C. Memo. 1998-387.

II. Accuracy-Related Penalty

      Respondent determined that petitioners are liable for the accuracy-related

penalty under section 6662(a) and (b)(2) for an underpayment attributable to a

substantial understatement of income tax with respect to the year in issue.

      Section 6662(a) and (b)(2) imposes a penalty equal to 20% of the amount of

any underpayment that is due to a substantial understatement of income tax. An

individual substantially understates his or her income tax when the understatement

exceeds the greater of 10% of the tax required to be shown on the return or

$5,000. Sec. 6662(d)(1)(A). Respondent has the burden of production with

respect to the accuracy-related penalty. See sec. 7491(c).
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       The underpayment of tax required to be shown on petitioners’ 2007 Federal

income tax return is due to a substantial understatement of income tax because the

understatement exceeds $5,000 and is greater than 10% of the tax required to be

shown on the return. See sec. 6662(b)(2), (d)(1); sec. 1.6662-4(b)(1), Income Tax

Regs. Respondent’s burden of production under section 7491(c) has been

satisfied.

       The accuracy-related penalty is not imposed, however, with respect to any

portion of an underpayment if the taxpayer can establish that he acted with

reasonable cause and in good faith with respect to such portion. Sec. 6664(c)(1).

The determination of whether a taxpayer acted with reasonable cause and in good

faith depends on the pertinent facts and circumstances, including the taxpayer’s

efforts to assess the proper tax liability, the knowledge and the experience of the

taxpayer, and the reliance on the advice of a professional, such as an accountant.

Sec. 1.6664-4(b)(1), Income Tax Regs.

       Petitioners omitted income from their 2007 Federal income tax return and

have not established that they maintained adequate records of the expenses

deducted on the return. Though petitioner asserted at trial that the 2007 return was

prepared by a return preparer, the 2007 return is signed by petitioners and

indicates that it was self-prepared. We understand that petitioners are not tax
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experts, but we conclude that they did not act with reasonable cause and in good

faith and that they are liable for the accuracy-related penalty under section 6662(a)

for taxable year 2007.

      To reflect the foregoing,


                                                Decision will be entered for

                                       respondent.
