                                  T.C. Memo. 2013-91



                         UNITED STATES TAX COURT



        TRAVIS C. TINNEY AND AMANDA A. TINNEY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 29009-10.                         Filed April 3, 2013.



      Travis C. Tinney, pro se.

      Randall B. Childs, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MORRISON, Judge: The respondent issued a notice of deficiency

determining a $72,105 deficiency in the petitioners’ federal income tax and a

$14,421 accuracy-related penalty under section 6662(a) for the 2006 tax year.

Unless otherwise indicated, all section references are to the Internal Revenue Code
                                         -2-

[*2] as in effect for the 2006 tax year. The respondent is referred to as the IRS.

The petitioners are referred to as Travis Tinney and Amanda Tinney (collectively,

Tinneys).

      After concessions by the parties,1 the issues for decision are:

      (1)    whether the Tinneys failed to report $101,963 of gross receipts on

             Schedule C, Profit or Loss From Business;

      (2)    whether the Tinneys are entitled to deduct $8,696 in Schedule C car

             and truck expenses disallowed in the notice of deficiency;

      (3)    whether the Tinneys are entitled to $33,644 in miscellaneous itemized

             deductions claimed on Schedule A, Itemized Deductions, of their

             return; and

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

             pursuant to section 6662(a).


      1
        The Tinneys reported $10 in gambling income on their return. The notice of
deficiency determined that their gambling income was $2,250, resulting in an
adjustment of $2,240. The Tinneys have conceded they had $2,250 in gambling
income. The IRS has conceded that they are entitled to an itemized deduction for
$2,250 in gambling expenses. This concession is reflected on page 41 of the
transcript of the proceedings of February 10, 2012.
       The Tinneys also reported $42,466 in short-term capital gains. The notice of
deficiency determined they had short-term capital gains of $154,842, resulting in an
adjustment of $112,376. The IRS conceded this adjustment and agrees with the
amount reported on the return.
                                        -3-

[*3]                           FINDINGS OF FACT

       Some facts have been deemed admitted under Tax Ct. R. Pract. & Proc.

91(f) and are so found. The Tinneys resided in Florida at the time the petition was

filed. Travis Tinney was self-employed in the construction industry during 2006.

Amanda Tinney, his wife, was a homemaker. The Tinneys filed a Form 1040, U.S.

Individual Income Tax Return, for 2006. An accountant prepared the return, which

included a Schedule C and a Schedule A. The Tinneys did not review the return

before signing it. The adjustments in the notice of deficiency are summarized in the

table below.
                                         -4-

                    [*4] Adjustments in the notice of deficiency
                        (except computational adjustments)
                                        As reported on     IRS           Total after
                 Item                     the return   adjustments      adjustments
 Gross receipts from Travis
  Tinney’s Schedule C business             $24,100        $101,963       $126,063
 Gambling income                                 10           2,240          2,250
 Short-term capital gain                    42,466         112,376         154,842
 Car and truck expense
  deductions (total):                       20,985           (8,696)        12,289
   Mileage                                  14,560           (2,271)        12,289
   Insurance                                   1,480         (1,480)         -0-
   Repairs and maintenance                     4,945         (4,945)         -0-
 Schedule A “other expenses”                33,644          (33,644)         -0-

The case was tried in Tampa, Florida.

                                      OPINION

      One procedural matter requires attention before we proceed to the merits of

this case. When the case was called for trial, Amanda Tinney did not appear, nor

was there any appearance on her behalf. Travis Tinney did appear. As Travis

Tinney had no authority to represent his wife, and there was no other appearance by

her or on her behalf, the Court will, on its own motion, dismiss her from this
                                         -5-

[*5] case for lack of prosecution. A decision will be entered against Amanda

Tinney for a deficiency and a penalty in the same amounts as those ultimately

determined against Travis Tinney.

      The taxpayer generally bears the burden of proving by a preponderance of the

evidence that the IRS’s determinations in the notice of deficiency are incorrect. Tax

Ct. R. Pract. & Proc. 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933);

Bronstein v. Commissioner, 138 T.C. 382, 384 (2012). Under section 7491(a), if

the taxpayer produces credible evidence with respect to any factual issue relevant to

ascertaining the taxpayer’s liability for tax and meets other requirements, the burden

of proof rests on the IRS as to that factual issue. The Tinneys have not established

their compliance with the requirements of section 7491(a). They bear the burden of

proof with respect to the deficiency determined in the deficiency notice. See Tax

Ct. R. Prac. & Proc. 142(a).

1.    Whether the Tinneys failed to report $101,963 of Schedule C gross receipts

      The Tinneys attached a Schedule C to their 2006 return for Travis Tinney’s

construction business Travis Tinney operated. They reported gross receipts of
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[*6] $24,100. The facts deemed established show that the Tinneys failed to report

$101,963 in gross receipts.2

      We hold that the Tinneys failed to report $101,963 in gross receipts for

Travis Tinney’s construction business.

2.    Whether the Tinneys are entitled to an $8,696 deduction for Schedule C car
      and truck expenses disallowed in the notice of deficiency

      On the Schedule C the Tinneys claimed deductions of $14,560 for car and

truck expenses, $1,480 for insurance, and $4,945 for repairs and maintenance.

These deductions--which total $20,985--related to an F-350 truck that Travis

Tinney used for business purposes. According to the return, the $14,650 in the car

      2
         It has been deemed admitted that the bank deposits analysis the IRS
performed showed that the Tinneys had unexplained bank deposits of $101,963 and
that this amount should have been, but was not, reported as gross receipts. At the
trial the Court told Travis Tinney that it would consider vacating its order deeming
these facts established if it were shown that those facts should not be deemed
admitted, but he did not challenge the accuracy of the deemed facts.
        If a taxpayer fails to keep adequate records, the IRS may reconstruct the
taxpayer’s income by any reasonable method that clearly reflects income. See, e.g.,
sec. 446(b); Holland v. United States, 348 U.S. 121, 130-132 (1954). One
acceptable method is the bank deposits method. Clayton v. Commissioner, 102
T.C. 632, 645 (1994); DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), aff’d, 959
F.2d 16 (2d Cir. 1992); Bevan v. Commissioner, T.C. Memo. 1971-312, aff’d, 472
F.2d 1381 (6th Cir. 1973). This method assumes that if a taxpayer is engaged in an
income-producing activity and makes deposits to bank accounts, then those
deposits, less amounts identified as nonincome items, constitute taxable income.
See Clayton v. Commissioner, 102 T.C. at 645-646. The record is devoid of any
books or records of the receipts and expenses of Travis Tinney’s construction
business.
                                        -7-

[*7] and truck category was equal to 32,720 miles multiplied by a business use

percentage of 100%, multiplied by a standard mileage rate of 0.445 dollars per mile.

The notice of deficiency allowed only a $12,289 deduction for the expenses for the

F-350 truck, which was calculated using the mileage method. Thus, the notice of

deficiency disallowed $2,271 of the $14,560 deduction the Tinneys claimed in the

car and truck category, it completely disallowed the $1,480 deduction claimed for

insurance, and it completely disallowed the $4,945 deduction claimed for repairs

and maintenance. The total disallowance was $8,696 (= $2,271 + $1,480 +

$4,945).

      The Tinneys presented no documentary evidence or testimony regarding the

disallowed F-350 truck expenses. Therefore they have not met their burden of

proof.3 We hold that they cannot deduct the $8,696 in disallowed expenses.

3.    Whether the Tinneys are entitled to $33,644 in Schedule A miscellaneous
      itemized deductions claimed on their return

      On their Schedule A, the Tinneys entered $33,644 as “other expenses” under

miscellaneous itemized deductions. A statement attached to the Schedule A gave

the following details:

      3
       Truck expenses are subject to the strict substantiation requirements of sec.
274(d). See sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985). The Tinneys have failed to satisfy their burden of proof even
without considering the effect of the strict substantiation requirements.
                                         -8-

                      [*8] Description                   Amount
            Seminars, travel & lodging                   $15,120
            Mileage--land investments                       8,010
            Legal fees--land investments                    1,100
            Listing fees--land investmen [sic]                150
            Telephone--land investments                     1,822
            Fax line--land investments                        105
            Internet--land investments                        390
            Postage--land investments                         756
            Hometown remodelers                             4,457
            Parking                                             8
            Tolls                                             281
            Marketing--land investments                     1,167
            Advertising                                       278
             Total                                         33,644

      At trial Travis Tinney testified that the $33,644 was the total expense of

repairing and rehabilitating rental properties that the Tinneys owned. One of these

properties, Travis Tinney testified, was 1315 Florida Avenue in St. Cloud,

Florida.4 He introduced no documents to support the deductibility of the $33,644 in

expenses.

      4
      The income and expenses from rental properties are required to be reported
on Schedule E, Supplemental Income and Loss, see Form 1040, line 17, but no
Schedule E was attached to the Tinneys’ Form 1040.
                                        -9-

[*9] To the extent the $33,644 constitutes travel expenses, no deduction is

available because there is no evidence corroborating Travis Tinney’s testimony.

See sec. 274(d). As for the nontravel expenses, there is insufficient information on

which to base an estimate of any deductible amount. Therefore, no deduction can

be allowed for nontravel expenses. See Williams v. United States, 245 F.2d 559,

560 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731,742-743 (1985).

4.    Whether the Tinneys are liable for the accuracy-related penalty pursuant to
      section 6662(a)

      The IRS determined that the Tinneys are liable for an accuracy-related

penalty pursuant to section 6662(a) and (b)(1) and (2) for negligence or substantial

understatement of income tax. The IRS bears the burden of production with

respect to this penalty. See sec. 7491(c). To meet this burden, the IRS must

produce evidence establishing that it is appropriate to impose this penalty. Once

the IRS has done so, the burden of proof is upon the Tinneys. See Higbee v.

Commissioner, 116 T.C. 438, 449 (2001). Negligence includes a failure to make a

reasonable attempt to comply with internal revenue laws or to exercise ordinary

and reasonable care in preparing a tax return. See sec. 6662(c); sec. 1.6662-

3(b)(1), Income Tax Regs. Negligence also includes the failure to keep adequate

books and records or substantiate items properly. See sec. 1.6662-3(b)(1), Income
                                        - 10 -

[*10] Tax Regs. The Tinneys did not maintain adequate records of the disputed

items, and they did not review the return before filing it. The IRS has carried its

burden of production with respect to the section 6662(a) penalty for negligence. For

the same reasons we conclude (1) there was no reasonable cause for the

underpayment and (2) the Tinneys did not act in good faith. See sec. 6664(c)(1)

(the accuracy-related penalty does not apply with respect to any underpayment for

which it is shown that the taxpayer has reasonable cause and acted in good faith).

      We hold that the Tinneys are liable for a section 6662(a) penalty for

negligence.

      To reflect the foregoing,

                                                       Decision will be entered

                                                 under Rule 155 with respect to Travis

                                                 C. Tinney, and an appropriate order

                                                 and decision will be entered with

                                                 respect to Amanda A. Tinney.
