Mark A. & Julie R. Doyle, Petitioner

ADM .

RECORDE D

SFRV :I C; E

CAL ,

STAT .

S .T . JUDGE

FILE S

T .C . Summary Opinion 2008-107

UNITED STATES TAX COUR T

MARK A . AND JULIE R . DOYLE, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No . 17259-07S . Filed August 21, 2008 .

Mark A . and Julie R . Doyle, pro sese .

John C . Schmittdiel , for respondent .

DEAN, Special Trial Judge : This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code (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 for any other case . Unless otherwise indicated, subsequent section references are to the Code in effect for th e SERVED Aug 21 2008 years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure .

Respondent determined deficiencies of $2,046 and $608 in petitioners' 2003 and 2004 Federal income taxes, respectively .

Respondent also determined accuracy-related penalties under section 6662(a) of $409 .20 and $121 .60 for 2003 and 2004, respectively .

After concessions by petitioners,' the issues remaining for decision are whether petitioners are : (1) Entitled to claim deductions for interest, depreciation, and certain expenditures with respect to their "leasing activity and/or trucking business" ; and (2) liable for the accuracy-related penalty for each year .

Background Petitioners did not appear in person or by counsel at trial .

The case was submitted on a stipulation of facts and a supplemental stipulation of facts . Petitioners executed both stipulations . The stipulated facts, together with the exhibits attached thereto, are incorporated herein by reference . When the petition was filed, petitioners resided in North Dakota .

'Petitioners claimed investment interest expense deductions of $6,926 and $4,077 for 2003 and 2004, respectively . They concede that the deductions were not proper . Mrs . Doyle received $10,025 in premature distributions from a qualified retirement plan during 2003 ; petitioners concede that they are liable for a 10-percent additional tax of $1,003 on the distributions .

On September 25, 2002, Mr . Doyle purchased a "1993 Kenworth T600 Truck" for $11,000 from "The Load Line" . On October 1, 2002, Citizens State Bank lent Mr . Doyle the funds to acquire the truck . The terms of the promissory note provided that Mr . Doyle was to pay the bank the principal amount of $12,025 plus interest at the rate of 8 percent per annum on the unpaid principal balance from October 1, 2002, until paid in full . He was to make seven payments of $1,643 .58 and an estimated final payment of $1,643 .58 . He was to make the loan payments on the first day of each quarter starting January 1, 2003 . Petitioners paid $3,921 .22 on the note during 2003 .

Contemporaneously, Mr . Doyle entered into a purported lease agreement with WSB Trucking, Inc . (WSB), that is in effect a promissory note . The president of WSB, William S . Brown,3 signed the lease agreement on behalf of WSB . The lease provided that WSB was to pay Mr . Doyle the principal amount of $12,000 plus interest at the rate of 8 percent per annum on the unpaid principal balance from October 1, 2002, until paid in full . WSB was to make eight payments of $1,643 .58 and an estimated final payment of $1,643 .58 . WSB was to make loan payments on the firs t 2It is not clear from the record whether petitioners paid anything on the note in 2004 .

3Respondent represents that Mr . Brown is Mrs . Doyle's father .

day of each quarter starting January 1, 2003 . Mr . Doyle received a $1,643 .58 payment in 2003 via a check drawn on an account of WSB . On November 12, 2003, a $1,650 deposit was made to petitioners' personal bank account ; a notation made upon the deposit ticket indicates that WSB was the source of the deposit .

On January 13, 2003, petitioners registered the truck in their name as an interstate carrier with the North Dakota Department of Transportation .

Petitioners filed joint Forms 1040, U .S . Individual Income Tax Return, for 2003 and 2004 . Petitioners claimed refunds of $946 .27 and $587 .47 for 2003 and 2004, respectively . Neither Form 1040 included a Schedule C, Profit or Loss From Business, for petitioners' "leasing activity and/or trucking business" .

During the examination of petitioners' returns, petitioners submitted Forms 1040X, Amended U .S . Individual Income Tax Return, on April 20, 2006, which included Schedules C for their "leasing activity and/or trucking business" for 2003 and 2004 . The 2003 Schedule C listed gross receipts of $1,643 .58 and car and truck expenses of $21,600, for a net loss of $19,956 .42 . The 2004 Schedule C listed gross receipts of $1,632 .66 and car and truck expenses of $16,125, for a net loss of $14,492 .34 . Petitioners claimed refunds of $2,992 .40 and $2,175 .34 for 2003 and 2004, respectively . One year later, on April 25, 2007, respondent issued the notice of deficiency denying petitioners' Schedule C deductions (and resulting loss) because petitioners did not establish that : (1) The activity constituted "a bona fide business venture entered into for profit" ; (2) they paid or incurred the expenses ; (3) the expenses were paid for ordinary o r necessary business purposes ; or (4) the expenses qualify as allowable deductions under the Code .

On July 18, 2007, petitioners submitted Forms 1040X that included amended Schedules C for their "leasing activity and/or trucking business" for 2003 and 2004 . For 2003 petitioners removed the $21,600 in car and truck expenses and claimed a $2,300 depreciation deduction, a $2,370 deduction for paid mortgage interest, a $7,893 deduction for repairs and maintenance,' and a $525 deduction for taxes and licenses .

Petitioners' total expenses of $13,088 offset the $1,644 of reported gross receipts for an $11,144 loss for 2003 . For 2004 petitioners removed the $16,125 in car and truck expenses and claimed a $3,680 depreciation deduction and a $1,892 deduction for paid mortgage interest . Petitioners' total expenses of $5,572 offset the $1,632 of reported gross receipts for a $3,94 0 'Although petitioners raised the repairs and maintenance issue in their petition, they did not continue to assert their entitlement to the deduction in their pretrial memorandum or at trial . The issue is deemed abandoned, and they have in effect conceded that the claimed deduction was not proper . See Leahy v . Commissioner , 87 T .C . 56, 73-74 (1986) .

loss for 2004 . Petitioners reported $328 as the "amount you owe" for 2003 and claimed a $158 refund for 2004 .

Discussio n I .

Burden of Proo f In general the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer has the burden to prove that the determinations are in error . Rule 142(a) ; Welch v . Helvering , 290 U .S . 111, 115 (1933) . But the burden of proof on factual issues that affect a taxpayer's tax liability may be shifted to the Commissioner where the "taxpayer introduces credible evidence with respect to * * * such issue ." Sec .

7491(a)(1) . Petitioners have not met the requirements of section 7491(a)(2) to shift the burden of proof to respondent . See sec .

7491 (a) (1) and (2) ; Rule 142 (a) .

II .

Petitioners' Leasing Activity and/or Trucking Business Respondent asserts that the lease agreement is in fact a loan, and petitioners bought the truck merely to accommodate Mr .

Brown, "who apparently didn't have sufficient credit to obtain it" . Thus, "we don't think a loss is well-founded . " Petitioners contend that they entered into "a for profit venture" involving "over the road hauling" . It "did not produce as expected [because the truck needed major repairs] which provided insufficient income to WSB * * * and partial lease payments to us, who operate in a non-corporate format as sole proprietors ." Petitioners claim that they had an active role as "owners/operators assisting in scheduling loads, [setting up maintenance and repair services, and obtaining funding for] certain operational expenditures . " Petitioners' evidence consisted of the sales order for the truck, the promissory note, the lease agreement with WSB, a copy of the check received from WSB, a letter from North Star Community Credit Union, referencing certain interest and . late fee payments, and a letter from Workforce Safety & Insurance (WSI) .

The WSI letter states that WSI had received a wire transfer from Mrs . Doyle, which "satisfied your personal liability for workers compensation premiums for WSB Trucking, Inc ." Additionally, petitioners provided documentation substantiating the following expenditures :

Year 2003 2003 2003 2003 2004 2004 2004 Expense Certificate of title/registration License plate fee Interest Late fees Interest Late fees Workers compensation premium Amoun t $599 .5 9 5 .0 0 2,278 .3 5 60 .0 0 1,054 .6 1 60 .0 0 3,959 .4 0 Petitioners have not carried their burden to show that they, as opposed to WSB, were engaged in any "trucking activity" for 2003 and 2004 .

The terms of the lease agreement between Mr . Doyle and WSB were nearly identical to the terms of the promissory note that Mr . Doyle executed in favor of Citizens State Bank . In addition, WSB (and Mr . and Mrs . Brown) had filed a chapter 12 bankruptcy petition in February 1999, which was dismissed in July 2000 at the debtors' request . See Farmpro Servs ., Inc . v . Brown , 273 Bankr . 194, 195 (Bankr . 8th Cir . 2002) .5 The Court surmises that WSB (and/or Mr . Brown) would not have been able to acquire credit on such terms from an unrelated party in view of the bankruptcy filing . See Hall Paving Co . v . United States , 33 AFTR 2d 74-1192, at 74-1199, 74-1 USTC par . 9397, at 83,976 (N .D . Ga .

1974) ("the economic reality of a purported debt can be judged by whether an unrelated party would have extended credit in the circumstances .") . The Court finds, on the basis of all of the facts and circumstances, that the lease agreement was in fact a financing arrangement and that petitioners served only as conduits to pass funds between the bank and WSB . See Frank Lyon Co . v . United States , 435 U .S . 561, 573 (1978) ; Helvering v . F . & R . Lazarus & Co . , 308 U .S . 252, 255 (1939) ("the courts * * * are concerned with substance and realities, and formal written documents are not rigidly binding") ; Coulter Elecs ., Inc . v .

Commissioner , T .C . Memo . 1990-186 (the documents' terms and the parties' conduct were indicative of a loan relationship rather than a sale), affd . without published opinion 943 F .2d 1318 (11t h 5The Court takes judicial notice of the bankruptcy court's opinion . See Fed . R . Evid . 201 .

Cir . 1991) . Accordingly, petitioners have not received any income, nor are they entitled to claim any deductions on account of the financing arrangement . See Ill . Power Co . v .

Commissioner , 87 T .C . 1417 (1986) ; Guaderrama v . Commissioner , T .C . Memo . 2000-104, affd . 21 Fed . Appx . 858 (10th Cir . 2001) .

Respondent's determination is sustained .

III .

Accuracy-Related Penalt y Initially, the Commissioner has the burden of production with respect to any'penalty, addition to tax, or additional amount . Sec . 7491(c) . He satisfies this burden of production by coming "forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty ."

Higbee v .

Commissioner , 116 T .C . 438, 446 (2001) . Once the Commissioner satisfies this burden of production, the taxpayer must persuade the Court that the Commissioner's determination is in error b y supplying sufficient evidence of reasonable cause, substantia l authority, or a similar provision .

Id .

In pertinent part, section 6662(a) and (b)(1) and (2) imposes an accuracy-related penalty equal to 20 percent of the underpayment that is attributable to negligence or disregard of rules or regulations or a substantial understatement of income tax .' "Negligence" is defined to include "any failure to make a 6Because the Court finds for respondent on the negligence ground, the Court need not discuss the substantial understatemen t . .)

(continued .

i 10 - reasonable attempt to comply with the provisions of this title", and "disregard" is defined to include "any careless, reckless, or intentional disregard ." See sec . 6662(c) . Negligence also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly . See sec . 1 .6662- 3(b)(1), Income Tax Regs .

In interpreting section 6662, the Court has defined the term "negligence" as a "`lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under th e circumstances ."' Freytaa v . Commissioner , 89 T .C . 849, 887 (1987) (and cases cited thereat), affd . 904 F .2d 1011 (5th Cir .

1990), affd . 501 U .S . 868 (1991) .

Section 6664(c)(1) provides an exception to the section 6662(a) penalty : no penalty is imposed with respect to any portion of an underpayment if it is .shown that there was reasonable cause therefor and the taxpayer acted in good faith .

Section 1 .6664-4(b)(1), Income Tax Regs ., incorporates a facts and circumstances test to determine whether the taxpayer acted with reasonable cause and in good faith . The most important factor is the extent of the taxpayer's effort to assess his proper tax liability.

Id .

Circumstances that may indicate reasonable cause and good faith include an hones t 6 ( .

. . continued) of income tax ground .

misunderstanding of fact or law that is reasonable in view of the taxpayer's experience, knowledge, and education .

Id .

Petitioners have conceded that they improperly accounted for the distributions with respect to Mrs . Doyle's qualified retirement plan and that they claimed improper deductions . In addition, petitioners were not entitled to deduct the expenditures paid or incurred in their so-called leasing activity and/or trucking business . They did not establish reasonable cause or any defense for their noncompliance with the Code's requirements . The Court finds that respondent has met his burden of production and that petitioners were negligent . See Fairey v .

Commissioner , T .C . Memo . 2005-129 . Accordingly, respondent's determination is sustained .

Other arguments made by the parties and not discussed herein were considered and rejected as irrelevant, without merit, and/or moot .

To reflect the foregoing, Decision will be entered fo r respondent .