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WILLIAM M. HEFLEY AND AIMEE J. HEFLEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, T.C. Memo. 2024-4

FINDINGS OF FACT

Married couple who filed joint returns for the years at issue, practicing attorneys, licensed in Florida. During 2011 and most of 2012, husband employed by a law firm and the wife had her own solo legal practice, which the husband began working for in 2013.

During the years at issue the wife maintained eight bank accounts, and the RA conducted a bank deposits analysis of each of the accounts, determining petitioners had additional unreported gross receipts from the law firm of $17,372, $31,241, and $118,076 for 2011, 2012, and 2013, respectively. Petitioners submitted an amended return for 2013 during the examination, reporting gross receipts from the law firm of $230,241.

On the 2011 tax return, petitioners claimed a deduction for $11,035 in unreimbursed employee business expenses as well as $6,000 in charitable contribution deductions on Schedule A, Form 8283, Noncash Charitable Contributions, to support their donations. It listed donations of children’s clothing and toys made to Goodwill on March 10 and 12, 2011. Receipts from Goodwill petitioners submitted list the dates of the donations as March 10 and 12, 2012, reported the donated property as having a combined adjusted basis and fair market value of $10,000 and $6,000, respectively, claiming have determined the value of these donations by looking at catalogs.

On Schedules C of their 2011, 2012 and 2013 federal income tax returns, petitioners claimed various business expense deductions related to the law firm. Respondent disallowed entirely the following expense deductions: meals and entertainment; travel; employee benefit; depreciation; car and truck; supplies; AAA, license, and parking; automobile fuel; automobile repairs and maintenance; bank service charges for 2012; and clothing and uniform.

Respondent allowed deductions for the following expense categories that petitioners did not claim utilities; merchant fees; postage and delivery; process server; computer and internet; and business use of home for 2013. Petitioners reported and respondent made adjustments to the following expense categories: office expenses for 2011–13; bank service charges for 2011 and 2013; computer and internet for 2011; postage and delivery for 2011; business use of home for 2011 and 2012; answering service for 2012; and merchant fees for 2012.

The revenue agent examining petitioners’ returns concluded that petitioners were liable for section 6662(a) penalties for the years at issue. The revenue agent’s immediate supervisor approved imposition of the foregoing penalties on January 29, 2016, by signing a Civil Penalty Approval Form. Petitioners did not receive any notice or letter giving them an opportunity to request a conference with the Internal Revenue Service (IRS) Office of Appealsbefore receiving the notice of deficiency.

The Court held a partial trial with respect to the deficiencies and penalties, reserving for a future trial the issue of section 6015 relief (a joint spouse refuses responsibility). Petitioners declined to provide any direct testimony at the trial. Moreover, Ms. Hefley refused to sign a supplemental stipulation agreed to by Mr. Hefley and respondent that contained exhibits that may have substantiated some of the deductions disallowed in the notice of deficiency.

OPINION

Deficiencies

Petitioners have not addressed the unreported gross receipts or disallowed deductions determined in the notice of deficiency.

Penalties

Respondent determined that petitioners are liable for an accuracy-related penalty under section 6662(a) for each year at issue, a penalty equal to 20% of any portion of an underpayment of tax required to be shown on a return that is attributable inter alia to any substantial understatement of income tax or to negligence. A substantial understatement of income tax exists if the amount of the understatement for the taxable year exceeds the greater of 10% of the amount of tax required to be shown on the return for the taxable year or $5,000.