Trial Calendar: Los Angeles, CA Date: ____________
PRETRIAL MEMORANDUM FOR RESPONDENT
NAME OF CASE:
Persona , Petitioner, v.
Commissioner of Internal Revenue, Respondent.
DOCKET NO.
___________
ATTORNEYS:
Petitioner:
Pro Se
(443) 316-1334
AMOUNTS IN DISPUTE:
Filed Electronically
Respondent:
Persona __________
Year
Deficiency
Penalty I.R.C. § 6662(a)
2015
$39,241.00
None*
2016
$45,735.00
None*
*In the statutory notice of deficiency, respondent asserted I.R.C. § 6662(a) accuracy–related penalties in the amounts of $7,848.20 and $9,147.00 for tax years 2015 and 2016, respectively. Respondent concedes petitioner is not liable for these accuracy–related penalties.
STATUS OF CASE:
Probable Settlement
Probable Trial
Definite Trial X
CURRENT ESTIMATE OF TRIAL TIME: 6 hours
MOTIONS RESPONDENT EXPECTS TO MAKE:
Docket No. 21425-19
Motion to Dismiss for Lack of Prosecution
Motion to Enforce Subpoena
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If petitioner or an authorized representative on behalf of petitioner fails to appear at calendar call or for trial of this case, counsel for respondent plans to file a motion to dismiss for lack of prosecution.
If National Computer Service Consultants, Inc. and Cricket Wireless, LLC, AT&T U–Verse, Jerome Iheoma, Agyman Badu, Hank Luwanga, Curtis Small, Steven Amauwa, and Windell Cherry fail to respond to respondent’s subpoenas, or a representative thereof fails to appear at the trial to testify, counsel for respondent plans to file a motion to enforce trial subpoena.
STATUS OF STIPULATION OF FACTS: Completed In Process_X_
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ISSUES:
Tax Year 2015
- Whether petitioner is required to include in taxable income Interest in taxable income in the amount of $24.00.
- Whether petitioner is entitled to Schedule C2 – Other expenses in the amount of $77,013.00.
- Whether petitioner is entitled to Schedule C2 – Car and Truck Expenses in the amount of $6,667.00.
- Whether petitioner is entitled to Schedule C1 Other Expenses in the amount of $11,451.00.
- Whether petitioner is entitled to Schedule C1 – Car and Truck Expenses in the amount of $21,490.00.
Docket No. 21425-19
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Tax Year 2016
- Whether petitioner is required to include in taxable income Interest in taxable income in the amount of $13.00.
- Whether petitioner is entitled to Schedule C2 – Other expenses in the amount of $99,275.00.
- Whether petitioner is entitled to Schedule C2 – Car and Truck Expenses in the amount of $9,655.00.
- Whether petitioner is entitled to Schedule C1 – Other Expenses in the amount of $8,579.00.
- Whether petitioner is entitled to Schedule C1 – Car and Truck Expenses in the amount of $30,533.00.
- Whether petitioner is entitled to Schedule A – Itemized Deductions Qualified mortgage insurance premiums in the amount of $2,847.00.
WITNESS(ES) RESPONDENT EXPECTS TO CALL:
Nnabugwu C. Eze
Petitioner
Representative of the Internal Revenue Service
–
Respondent may call Mr. Eze to testify regarding the issues in this case.
Respondent may call a representative from the Internal Revenue Service to testify about the examination and issues in this case. In addition, to authenticate business records.
Representative of Cricket Wireless,
LLC
Representative of National Computer Service Consultants, Inc.
Respondent may call a representative of Cricket Wireless, LLC to testify regarding petitioner’s putative receipts.
Respondent may call a representative of National Computer Service Consultants,
Docket No. 21425-19
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Inc. to testify regarding petitioner’s Schedule C1 business.
Representative of AT&T U–Verse
Personas
Respondent may call a representative of AT&T U–Verse to testify regarding petitioner’s putative receipts.
Respondent may call Persona to testify regarding a putative contract with petitioner for home improvement.
Respondent may call Persona to testify regarding a putative contract with petitioner for home improvement.
Respondent may call Persona to testify regarding a putative contract with petitioner for home improvement.
Respondent may callPersona to testify regarding a putative contract with petitioner for home improvement.
Respondent may call Persona to testify regarding a putative contract with petitioner for home improvement.
Respondent may call Persona to testify regarding a putative contract with petitioner for home improvement.
Respondent reserves the right to call any witness listed or called by petitioner. Respondent reserves the right to call any witness whose testimony becomes relevant as a result of respondent’s examination of documents produced or testimony provided by petitioner after the date of this memorandum. Respondent also reserves the right to call any witness with respect to documentary evidence that has not been stipulated and reserves the right to call additional witnesses for rebuttal and/or impeachment purposes.
Docket No. _________
SUMMARY OF FACTS:
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At the time of the filing of the petition, petitioner resided in Owings Mill, Maryland. Petitioner filed a Form 1040 U.S. Individual Income Tax Return for his 2015 tax year (2015 return) and 2016 tax year (2016 return).
On Forms 1099–INT, payer NAVY reported taxable interest paid to petitioner in the amounts of $24.00 and $13.00 in tax years 2015 and 2016, respectively. Petitioner did not report either amount as taxable income on his 2015 and 2016 tax returns.
On Forms Schedules C1 attached to his 2015 return and 2016 return, petitioner reported income and claimed expenses in relation to his information technology consulting business. Petitioner conducted information technology consulting business as an independent contractor for National Computer Consultants.
On Form Schedules C2 attached to his 2015 return and 2016 return, petitioner reported income and claimed expenses in relation to his residential construction business. Pursuant to the notice of deficiency, respondent disallowed the above referenced claimed expenses on both Schedules C1 and C2 as addressed above.
On his 2015 return, petitioner claimed a deduction for qualified mortgage insurance premiums paid. GSF reported this same information on a Form 1098 Mortgage Interest Statement. On his 2016 return petitioner claimed a deduction for qualified mortgage insurance premiums paid in the amount of $2,847.00. No Form 1098 Mortgage Interest Statements were filed reporting any amount of qualified mortgage insurance premiums paid by petitioner in tax year 2016.
This case was originally scheduled for trial at the February 8, 2021, trial session. On January 28, 2021, petitioner filed his motion for continuance of trial requesting that the case be stricken from the February 8, 2021, trial session to allow the case to be reconsidered by respondent’s independent Office of Appeals. By Order dated February 5, 2021, the Court granted petitioner’s motion for continuance. On February 8, 2021, respondent’s counsel returned this case to respondents independent Office of Appeals for consideration.
Docket No. 21425-19
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On August 4, 2021, respondent’s independent Office of Appeals closed this case to respondent’s counsel for trial preparation. Respondent’s counsel invited petitioner and his authorized representative to attend respondent’s Virtual Settlement Day (VSD) on Friday September 3, 2021. Petitioner and his authorized representative participated in respondent’s VSD, providing additional documentation and explanation. During the VSD conference, the parties discussed the need for additional documentation and information. At the close of the VSD conference, petitioner agreed to provide additional documents.
On September 13, 2021, petitioner’s authorized representative notified the Court and respondent’s counsel that he had been diagnosed with coronavirus and would be unable to attend the October 4, 2021, trial session. By Order dated September 20, 2021, the Court struck this case from the October 4, 2021, trial session and ordered the parties to file a status report by November 1, 2021.
On October 22, 2021, the parties held a telephonic conference to discuss the need for additional information and documentation. On October 22, 2021, respondent’s counsel emailed to petitioner and his authorized representative a list of documents or pieces of information necessary to resolve the case. Respondent’s counsel specifically requested petitioner’s bank statements, proof the addresses shown on his Schedule C1 Car and Truck logs related to National Computer Service Consultants, Inc.’s business, and all books and records relating to petitioner’s Schedule C2 Other Expenses.
On October 29, 2021, respondent filed his status report requesting that this case be set for the first available trial session with a Los Angeles, California place of trial in the calendar year 2022. By Order dated November 15, 2021, the Court set this case for trial at the Los Angeles, California trial session to be held on March 28, 2022.
On February 10, 2022, petitioner filed his notice of change of address and telephone. It should be noted that nearly all of respondent’s communications to petitioner and many of the documents served on petitioner by the Court and respondent were returned undeliverable.
On February 11, 2022, respondent filed his motion to show cause why proposed facts and evidence should not be accepted as established pursuant to Rule
Docket No. ___
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91(f) (“motion pursuant to Rule 91(f)). By Order dated February 15, 2022, the Court ordered petitioner to respond to respondent’s motion by March 18, 2022.
As noted in respondent’s motion pursuant to Rule 91(f), petitioner provided additional documentation after respondent drafted the proposed stipulation of facts. These new documents purport to be: copies of emails between petitioner and National Computer Services Consultants, Inc. regarding petitioner’s timesheets: a copy of petitioner’s work ID for Northrup Grumman and National Computer Service Consultants: Northrup Grumman Work Authorization Forms; and six Independent Contractor Agreements between petitioner and Jerome Iheoma, Agyman Badu, Hank Luwanga, Curtis Small, Steven Amauwa, and Windell Cherry, respectively.
Respondent continues to question petitioner’s putative records‘ authenticity and issued multiple subpoenas to third parties for copies of records relating to petitioner’s income and expenses. As of the filing of the instant pretrial memorandum, respondent’s counsel expects this case will require a trial.
BRIEF SYNOPSIS OF LEGAL AUTHORITIES:
Unreported Income
Gross income includes all income from whatever source derived, including interest income. I.R.C. § 61(a)(4). In unreported income cases, the normal presumption of correctness attaches to the deficiency determination so long as it is not “without rational foundation. United States v. Janis, 428 U.S. 433, 441 (1976). Respondent must present evidence linking the taxpayer to the income- producing activity, or demonstrating the taxpayers received unreported income. Weimerskirch v. Commissioner, 596 F.2d 358, 362 (9th Cir. 1979), rev’g. 67 T.C. 672 (1977). When the Service produces evidence of unreported income, the burden of proof to rebut the Service’s presumption of correctness is properly placed on the taxpayer. Estrada v. Commissioner, 156 F.3d 1236 (9th Cir. 1998). Respondent intends to present wage and income transcripts evidencing petitioner received and failed to report taxable interest income for tax years 2015 and 2016. It is respondent’s counsel’s understanding that petitioner concedes these adjustments.
Docket No. 21425-19
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Schedule C Substantiation
Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to the claimed deductions. Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see also Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d. per curiam, 540 F. 2d 821 (5th Cir. 1976). Taxpayers are required to maintain books and records to substantiate claimed deductions. I.R.C. § 6001; see also Treas. Reg. § 1.6001-1(a); Krist v. Commissioner, T.C. Memo. 2001-140.
The Internal Revenue Code generally allows deductions for ordinary and necessary expenses paid or incurred in the carrying on of a trade or business, or in the case of an individual, paid or incurred for the production of income. I.R.C. §§ 162(a); 212(1). The determination whether an expenditure satisfies the requirements for deductibility under I.R.C. § 162 is a question of fact. Commissioner v. Heininger, 320 U.S. 467, 471 (1943). In cases where the Court believes that the taxpayer incurred expenses in a trade or business, but where the taxpayer is unable to substantiate the amount of the expense, the Court may estimate the expense. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2nd Cir. 1930). In order for the Court to make an estimation of a taxpayer’s expenses, the Court must have some basis upon which to make that estimation. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
No deduction is allowable with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, unless the taxpayer establishes that the item was directly related to, or, in the case of an item directly preceding or following a substantial and bona fide business discussion, that such item was associated with, the active conduct of the taxpayer’s trade or business (or activity described in I.R.C. § 212). I.R.C. § 274(a)(1)(A), (a)(2)(B).
To demonstrate his entitlement to his Schedule C1 Expenses, petitioner provided the following documents: (i) copies of invoices from petitioner to National Computer Services, Consulting, Inc.; (ii) Cricket Wireless receipts; (iii) AT&T U–verse Statements; (iv) a copy of a Social Security Card for a minor, P.E.; (v) a billing statement from Raymond Nze, M.D., M.P.H. dated August 25, 2014; (vi) a payment summary from Liberty Christian School for a student, Z.E., for the period January 1, 2015, through December 31, 2015; (vii) calendars; (viii) non- contemporaneous mileage logs; (ix) invoices from Tire House Auto Center; and (x)
Docket No. __________
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a copy of petitioner’s insurance identification card. Respondent reserves various objections to these documents as reflected in the proposed stipulation of facts attached to respondent’s Motion pursuant to Rule 91(f). Critically, respondent questions these receipts‘ authenticity and relevance in connection to petitioner’s Schedule C1 business.
To demonstrate his entitlement to his Schedule C2 Expenses, petitioner provided the following documents: (i) Home Depot Receipts; (ii) Lowe’s receipts; (iii) 84 Lumber receipts; (iv) non–contemporaneous mileage logs; and (v) a summary of odometer readings. Respondent reserves various objections to these documents as reflected in the proposed stipulation of facts attached to respondent’s Motion pursuant to Rule 91(f). All of the purchases reflected on the Home Depot, Lowe’s, and 84 Lumber receipts were paid in cash. Respondent has repeatedly requested copies of petitioner’s bank statements or other records sufficient to demonstrate petitioner had cash on hand sufficient to make these purchases. Respondent has also requested evidence tying these purchases to petitioner’s business activities. Petitioner has been either unable or unwilling to provide respondent with the requested documentation.
Schedule C Strict Substantiation
In addition to the general rules applicable to substantiation of business expenses, strict substantiation requirements apply to expenses claimed for entertainment, travel (including lodging and meals away from home), gifts, and listed property (defined in I.R.C. § 280F(d)(4) to include, among other things, passenger automobiles). I.R.C. § 274(d). The taxpayer must substantiate the amount, time, place, and business purpose of such expenses by adequate records or by sufficient evidence corroborating his own statement. I.R.C. § 274(d); Golden v. Commissioner, T.C. Memo. 1993-602. To substantiate a deduction by means of adequate records, a taxpayer must maintain an account book, diary, log, statement of expense, trip sheets, and/or other documentary evidence which, in combination, are sufficient to establish each element of expenditure or use. Treas. Reg. § 1.274- 5T(c)(2)(i). “Although a contemporaneous log is not required, corroborative evidence to support a taxpayer’s reconstruction of the elements *** of the expenditure or use must have a high degree of probative value to elevate such statement‘ to the level of credibility of a contemporaneous record.” Fessey v. Commissioner, T.C. Memo. 2010-191, 2010 WL 3397474 at *3, citing Treas. Reg. § 1.274-5T(c)(1) (ellipsis in original). No expense subject to strict substantiation
C
Docket No. ______________
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under I.R.C. § 274(d) may be estimated under Cohan v. Commissioner. Sanford v. Commissioner, 50 T.C. 823, 827-28 (1968), aff’d 412 F.2d 201 (2d Cir. 1969).
As noted above, petitioner provided calendars, non–contemporaneous mileage logs, odometer readings, and receipts for automotive repair and maintenance to demonstrate his mileage. Despite multiple requests, petitioner has not provided respondent with any evidence linking the addresses reported on his calendars or mileage logs to either his Schedule C1 or Schedule C2 businesses. Without evidence linking these specific addresses to petitioner’s business activities, petitioner cannot demonstrate the business purpose of these trips.
Qualified Mortgage Insurance Premiums
Generally, a taxpayer may not deduct payments for personal interest. I.R.C. § 163(h)(1). A taxpayer may deduct qualified residence interest. I.R.C. § 163(h)(2)(D). Qualified residence interest means any interest paid or incurred with respect to either acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. I.R.C. § 163(h) (3)(A)(i–ii). Insurance premiums paid or accrued for qualified mortgage insurance in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer is treated as qualified residence interest. I.R.C. § 163(f)(3)(E)(i).
On a Form 1098 Mortgage Interest Statement, CENLAR FSB reported petitioner paid mortgage interest in the amount of $2,846.00 during tax year 2016. These payments were made in relation to property located at _________________ In his 2015 and 2016 returns, petitioner stated was __________________ Petitioner has provided no evidence tending to show he has any connection to the property located at ________________
Docket No. ____________
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EVIDENTIARY PROBLEMS:
None anticipated.
Date: March 4, 2022
Persona Attorney (Los Angeles, Group 2) (Small Business/Self–Employed)
ADDRESS
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