Wesley v. Comm'r

CHIECHI, Judge: Respondent determined a deficiency in, and an accuracy-related penalty under section 6662(a)¹ on, petitioners' Federal income tax (tax) for their taxable year 2011 of $15,649 and $2,670, respectively.

*201 The issues remaining for decision for petitioners' taxable year 2011 are:

(1) Are petitioners entitled to a deduction under section 170(a) for claimed charitable contributions in excess of the deduction that respondent allowed under that section? We hold that they are not.

(2) Are petitioners liable for the accuracy-related penalty under section 6662(a)? We hold that they are.

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

Petitioners resided in Missouri at the time they filed the petition.

During 2011, petitioners Donald A. Wesley (Mr. Wesley) and Sandra F. Wesley (Ms. Wesley) operated Disciples Empowered by Christ Ministries, a community outreach program. (We shall sometimes refer to Disciples*209 Empowered by Christ Ministries as the ministry.) At all relevant times, petitioner Mr. Wesley served as pastor of the ministry. In his capacity as pastor, Mr. Wesley controlled the ministry.

Petitioners timely filed a tax return (return) for their taxable year 2011. Petitioners attached to that return Schedule A, Itemized Deductions, and claimed a charitable contribution deduction of $28,697.

*202 Respondent issued to petitioners a notice of deficiency (notice) for their taxable year 2011. In that notice, respondent determined, inter alia, that petitioners are liable for their taxable year 2011 for the accuracy-related penalty under section 6662(a).²

After respondent issued the notice to petitioners, petitioners submitted to respondent Form 1040X, Amended U.S. Individual Income Tax Return (amended return), for their taxable year 2011. In petitioners' amended return, petitioners showed, inter alia, an additional deduction for claimed charitable contributions in excess of the amount that they had claimed in their return and that respondent did not disallow in the notice.

Petitioners*210 bear the burden of establishing that the determinations in the notice that remain at issue are erroneous.³SeeRule 142(a); Welch v. Helvering, 290 U.S. 111, 115, 54 S. Ct. 8, 78 L. Ed. 212, 1933-2 C.B. 112 (1933). Deductions are a matter of legislative grace, and petitioners must prove their entitlement to any deductions claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84, 112 S. Ct. 1039, 117 L. Ed. 2d 226 (1992). The Code and the *203 regulations thereunder required petitioners to maintain records sufficient to establish the amount of any deduction claimed. Seesec. 6001; sec. 1.6001-1(a), Income Tax Regs.

We consider first petitioners' position that, in addition to the charitable contribution deduction that they had claimed in their 2011 return and that respondent did not disallow in the notice, they are entitled to a charitable contribution deduction of $3,976.51⁴ for contributions that they claim they made during 2011 to or for the use of the ministry. (We shall refer to the additional charitable contribution deduction of $3,976.51 that petitioners are claiming here as the charitable contribution amount at issue.) In support of their position, petitioners rely on their respective testimonies and certain documents, each of which is titled "Contributions Statement". (We shall refer to the documents titled*211 "Contributions Statements" as petitioners' claimed documents.⁵)

*204 With respect to the respective testimonies of Mr. Wesley and Ms. Wesley, we found their testimonies to be in certain material respects uncorroborated and self-serving. We shall not rely on the respective testimonies of Mr. Wesley and Ms. Wesley to establish petitioners' position that they are entitled to deduct the charitable contribution amount at issue. See, e.g., Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

With respect to petitioners' claimed documents, Mr. Wesley acknowledged during his testimony that he "manufactured" those documents in 2014, approximately*212 three years after petitioners' taxable year at issue. Nonetheless, the respective purported preparation dates on many of petitioners' claimed documents show a date in 2011, not in 2014. By way of further illustration of the unreliable nature of petitioners' claimed documents, one of petitioners' claimed documents shows a contribution purportedly made to the ministry when in fact, as Mr. Wesley acknowledged at trial, the amount shown on that document was purportedly given to United Way. Another of petitioners' claimed documents shows a contribution purportedly made to the ministry when in fact, as Mr. Wesley acknowledged at trial, the amount shown on that document was paid by use of a credit card in the *205 name of the ministry, not a credit card in the name of petitioners. We shall not rely on petitioners' claimed documents to establish petitioners' position that they are entitled to deduct the charitable contribution amount at issue.

Section 170(a) allows a deduction for any charitable contribution, as defined in section 170(c), that is made during a taxable year. A taxpayer claiming a deduction under section 170(a) must satisfy certain statutory and regulatory requirements. (We shall refer collectively to the statutory and regulatory*213 requirements as the charitable contribution deduction requirements.) Seesec. 170(a), (c), (f); secs. 1.170A-1, 1.170A-13(a)-(c), Income Tax Regs. The charitable contribution deduction requirements that a taxpayer must satisfy vary depending on (1) whether the claimed contribution consists of money or property other than money and (2) the value of the contribution. Seesec. 170(a), (c), (f); secs. 1.170A-1, 1.170A-13(a)-(c), Income Tax Regs. On the record before us, we find that petitioners have failed to carry their burden of establishing that they satisfy the applicable charitable contribution deduction requirements with respect to the charitable contribution amount at issue.

On the record before us, we find that petitioners have failed to carry their burden of establishing that they are entitled to deduct under section 170(a) the charitable contribution amount at issue.

*206 We consider now the accuracy-related penalty under section 6662(a) that respondent determined in the notice. That section imposes an accuracy-related penalty of 20 percent of the underpayment to which section 6662 applies. Section 6662 applies to the portion of any underpayment which is attributable to, inter alia, (1) negligence or disregard of rules or regulations, sec. 6662(b)(1), or (2) a substantial understatement of tax, sec. 6662(b)(2). Respondent argues that petitioners are liable for their taxable*214 year 2011 for the accuracy-related penalty because of negligence or disregard of rules or regulations and because of a substantial understatement of tax.

The term "negligence" in section 6662(b)(1) includes any failure to make a reasonable attempt to comply with the Code. Sec. 6662(c). Negligence has also been defined as a failure to do what a reasonable person would do under the circumstances. Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992), aff'gT.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C. 686, 699 (1988), aff'd, 893 F.2d 656 (4th Cir. 1990). The term "negligence" also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. The term "disregard" includes any careless, reckless, or intentional disregard. Sec. 6662(c).

*207 For purposes of section 6662(b)(2), an understatement is equal to the excess of the amount of tax required to be shown in the tax return over the amount of tax shown in the return. Sec. 6662(d)(2)(A). An understatement is substantial in the case of an individual if the amount of the understatement for the taxable year exceeds the greater of 10 percent of the tax required to be shown in the tax return for that year or $5,000. Sec. 6662(d)(1)(A).

The accuracy-related penalty under section 6662(a) does not apply to any portion of an underpayment if it is shown that there was reasonable cause for, and that the taxpayer acted in good faith with respect to, such*215 portion. Sec. 6664(c)(1). The determination of whether the taxpayer acted with reasonable cause and in good faith depends on all the pertinent facts and circumstances, including the taxpayer's efforts to assess the taxpayer's proper tax liability, the knowledge and 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.

Respondent bears the burden of production with respect to the accuracy-related penalty under section 6662(a) that respondent determined in the notice. Seesec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). To satisfy respondent's burden of production, respondent must come forward with "sufficient evidence indicating that it is appropriate to impose" the penalty. *208 Higbee v. Commissioner, 116 T.C. at 446. Although respondent bears the burden of production with respect to the penalty under section 6662(a), respondent "need not introduce evidence regarding reasonable cause * * * or similar provisions. * * * [T]he taxpayer bears the burden of proof with regard to those issues." Id.

Petitioners concede that they have the unreported income of $50,830 that respondent determined in the notice.⁶ On the record before us, we find that respondent has satisfied respondent's burden of production under section 7491(c) with respect to the accuracy-related penalty under section 6662(a).

Section 1.6662-3(b)(1)(i) of the Income Tax Regulations*216 provides that negligence is strongly indicated where "[a] taxpayer fails to include [i]n an income tax return an amount of income shown [i]n an information return". Petitioners present the following argument as to why they were not negligent:

The petitioners acknowledge their lack of due diligence regarding the timeliness of filing the original 2011 1040 form. * * * The petitioners did eventually file a return for 2011 [using Form] 1040X and when they realized their mistake, they did attempt to rectify it by maintaining dialogue with the local IRS Office and the U.S. Tax Courts [sic]. * * * They did report their correct income to the IRS.

*209 We do not understand how petitioners' above-quoted argument relates to whether the accuracy-related penalty should be imposed on them for their taxable year 2011, let alone how it establishes that they are not liable for that year for that penalty. On the record before us, we find that petitioners have failed to meet their burden of proving that they were not negligent in failing to include $50,830 of unreported income in their 2011 return.

On the record before us, we find that petitioners have failed to carry their burden of establishing that there was reasonable cause for, and that they acted in good faith with respect to, the underpayment for their taxable year 2011.

On the record before us, we find that*217 petitioners have failed to carry their burden of establishing that they are not liable for their taxable year 2011 for the accuracy-related penalty under section 6662(a).⁷

*210 We have considered all of the contentions and arguments of petitioners⁸ and respondent that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot.

To reflect the foregoing and petitioners' concession,

Decision will be entered for respondent.