T.C. M em o . 2 0 2 1 -8 7

UNITED STATES TAX COURT

BLOSSOM DAY CARE CENTERS, INC., Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 3 8 6 8 -1 2 , 3 8 6 9-1 2
. 1 Fi l edJ u l y 1 3, 2 0 21
.

St ev enP. Fl o wers an d Nat h al i e M . Co rn et t , fo r p et it i o n er. W i l l i am F. Cas t o r an dVas s i l i k i Eco n o m i d es Farri o r, fo r res p o nd en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION PARIS, J u d g e: By

n ot i ce o f d efi ci en cy

d at edNo v em

b er 1 4 , 2 0 1 1,
res p o n d en t d et erm i nedd efi ci en ci es i nth e Fed eral i n co m e t ax o f Bl os s o m Day

1 Th es e cas es were co n s o l i d at edfo r t ri al , b ri efi n g , an do p in i o n . Th e s ub ject o f t h i s o p i n i o n wi l l p ert ai n t o th o s e i s s u es ari s i n g o u t o f d o ck etNo
. 3 86 8 -1 2
. Th o se i s su es ari si n g o u t o f d o ck etNo . 3 8 6 9 -1 2 are ad dres sedi nBl o s s o m Day Care Ct rs ., In c. v . Co m

m i s si o ner, T.C. M em o . 2 02 1 -8 6 , fi l edt o d ay .

Served 07/13/21- 2
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[* 2 ] Care Cen ters , In c. (p et it i o n er), o f $ 7 0 ,2 3 9, $ 1 0 9 ,8 13 , $ 1 0 9 , 5 57 , an d $ 1 3 0 ,9 6 7
an d ci v i l frau dp en al t i es u n d er s ect io n6 6 6 3 2 o f $ 5 2,6 7 9 .2 5 , $ 8 2 ,3 5 9 .7 5 , $ 8 2 ,1 6 7 .7 5 , an d $ 9 8 , 2 2 5 .2 5 fo r 2 0 0 4 , 2 0 0 5 , 2 0 06 , an d 2 0 0 7 , res p ect i v el y . Inth e al t ern at i v e res p o n den tas s ert s accu racy -rel at edp en al t i es p u rs u an t t o s ect io n 6 6 6 2 (a) fo r t h e y ears ati s s u e. Res p on d en tad d i t i o n al l y d et erm i n edth atp et i t i o ner i s l iab l e fo r an ad d i ti o n t o t ax p u rs uan tt o s ect i o n6 6 5 1 (a)(1 ) o f $ 3 2 ,7 4 1 .7 5 fo r 2 0 0 7
. Aft er co n ces si o ns , 3 th e i s s u es fo r d eci si o nare: (1 ) wh et h er p et i t i o n er’ s g ro s s recei p ts s h o u l db e ad j u s t edb y ! $2 0 3 ,6 5 9 ,

! $ 3 14 ,7 9 7 , $ 1 6 0 ,7 01 , an d $1 8 ,8 8 8 fo r 2 0 0 4 , 2 0 0 5 , 2 0 0 6 , an d2 0 0 7, res p ect i v el y ; (2 ) wh et h er p et i t i o n er fai l edt o rep o rtcap i t al g ai ni n co m e o f $ 5 8 ,9 8 0 fo r 2 0 0 4 o n th e recap tu re o f p ri o r-y ear d ep reci at io no ntwo v eh i cl es an dg ai n o nth e trad e-i n of a t h i rd v eh i cl e;

2 Un l es s o th erwi s e i nd i cat ed , al l s ect i o nreferen ces are t o th e In t ern al Rev enu e Co de (Co d e) i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re.

3 Pet i t i on er h as co nced edth ati ti s n o t en ti t ledt o d edu ct : (1 ) ch ari tab l e co n tri b u t i o n s o f $ 2 ,2 6 6 fo r 2 0 0 4 ; (2 ) ren t al ex p en s es o f $ 1 3 6 ,6 52 fo r 2 0 0 5 ; (3 ) co m pen s at i o n t o o ffi cers o f $ 1 0 0 ,0 0 0 fo r 2 0 06 ; (4 ) l eg al an dp ro fes s io n al fees o f $ 2 , 0 0 0 fo r 2 0 0 6 ; an d (5 ) b an kch arg es o f $ 1 ,5 5 1 fo r 2 0 0 7 . Res p o n d en t h as co n ced edth atp et i t io n er i s en t i t l edt o d eductrep ai rs ex p en s es o f $ 5,2 9 1 fo r 2 0 0 6
.- 3
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[* 3 ] (3 ) wh et h er p et i t i o n er fai l edt o rep o rtcap i t al g ai no f $ 1 2 8 ,4 6 8 fo r 2 00 5 o n th e t ran s fer o f real p ro p erty t o Hack er Co rp .; (4 ) wh et h er p et i t i o n er recei v edren t al i n co m e fro m p ro p ert y at Kat y St ., San d Sp ri n g s, Ok l ah om a, o f $ 2 ,9 9 7 , $ 5 ,2 84 , an d$ 4 ,8 5 1 fo r 2 0 05 , 2 00 6 , an d2 0 0 7 , res p ect i vel y ; (5 ) wh et h er p et i t i o n er i s en t it l ed t o d edu ct d ep reci at i o no f $ 5 6 ,3 7 4 , $ 2 6 ,7 0 8, $ 2 0 ,8 2 0 , an d$ 5 1,4 1 5 fo r 2 0 0 4 , 2 0 0 5 , 2 0 0 6 , an d2 0 0 7 , res pect i v el y ; (6 ) wh et h er p et i t i o n er i s en t it l ed t o d edu ct b us i n es s ex p en s es , d et erm i n edb y
res p o n d en t t o b e n o nb u si n es s o r p ers o n al ex p en s es , o f $ 2 7 8 , 5 5 6 , $ 3 6 0,4 0 5 , $ 4 8 ,3 2 4 , an d$ 2 1,8 3 0 fo r 2 0 0 4 , 2 0 0 5 , 2 0 0 6 , an d2 0 0 7 , res pect i v el y ; (7 ) wh et h er p et i t i o n er i s en t it l ed t o d edu ct m an ag em en tfees p ai dt o Hack er Co rp . o f $ 1 8 7 ,5 00 , $ 8 4 ,2 5 0 , an d$ 6 7 ,7 8 4 , i nex ces s o f t h o s e am o un t s res p o n d en t al l o wed fo r 2 0 0 4, 2 0 0 5 , an d2 0 0 6 , res p ect i v el y ; (8 ) wh et h er p et i t i o n er i s en t it l ed t o d i s al l o wedi nt eres t ex pen s e d edu ct i o n s
o f $ 1 2,9 1 7 , $ 1 7 ,9 63 , an d$ 1 7 ,3 5 9 fo r 2 0 04 , 2 00 6 , an d2 0 0 7 , res p ect i v el y , an dan i n creas edd edu ct i o n o f $ 4 3 , 2 4 5 fo r 2 0 0 5 ; (9 ) wh et h er p et i t i o n er i s en t it l ed t o d edu ct rep ai rs ex p en s es o f $ 1 ,6 7 4 , $ 3 8 ,7 7 5 , $ 1 8,6 5 5, an d$ 27 ,7 00 i n ex ces s o f t h o se am o un t s res p o n d en tal l o wedfo r 2 0 0 4 , 2 0 0 5 , 2 0 0 6, an d2 00 7 , res p ect i v el y ;- 4
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[* 4 ] (1 0 ) wh et her p et i ti o n er i s en t i t l edt o d edu cts up p l i es ex p en s es o f $ 4 3 6 ,4 0 8 i n ex ces s o f t h e am o un tres p o n d en tal lo wed fo r 2 0 07 ; (1 1 ) wh et her p et i ti o n er i s en t i t l edt o cl ai m edIn d i an em p lo ym en tt ax cred i t s p u rs u an t t o s ect io n 4 5A fo r 2 0 0 4 , 2 0 0 5 , 2 0 0 6 , an d 2 0 0 7 ; (1 2 ) wh et her p et i ti o n er i s en t i t l edt o d edu ctwag e ex p en s es o f $ 1 98 ,7 4 0 , $ 2 0 9 ,2 0 0 , $ 22 0 ,2 1 0 , an d$ 2 3 1 ,8 0 0 fo r 2 0 0 4, 2 0 0 5 , 2 0 06 , an d2 0 0 7 , res p ect i v el y , o n th e b as i s o f res p on d en t’ s d et erm i n at io n s o f wag es p ai dt o BarryA. Hack er an d Cel es t e Hack er (M r. an dM rs . Hack er, res p ect i v el y , o r co l l ect i v el y , Hack ers ); 4 (1 3 ) wh et her p et i ti o n er i s l i ab l e fo r an ad d i t io n t o t ax fo r fai lu re t o t i m el y fi le, p u rs u an tt o s ect i o n 6 6 51 (a)(1 ), fo r 2 0 07 ; an d (1 4 ) wh et her p et i ti o n er i s l i ab l e fo r t h e ci v i l frau d p en al t ies u n d er s ect i o n 6 6 6 3 (a) o r, i n t h e al t ern at i v e, accu racy -rel at edp en al t ies u n d er s ect i o n6 6 6 2 (a), fo r 2 0 0 4 thro u g h 2 0 0 7
.

4 In ad d i t i o n t o the No ti ce o f Defi ci en cy th ati s th e s ub

jecto f th i s o pi n i o n , res p o n d en t i s s uedt o p et i t io n er a No t i ce o f Det erm i n at i o no f W ork er Cl as s i fi cat i o n , i n wh i ch h e d et erm i n edth atthe Hack ers were em p l o y ees o f p et i t i o n er an drem

u n erat i o n p ai dt o th e Hack ers co n st i tu t ed wag es . Th e Co u rt res o l vedth o s e i ss u es rel at i ng t o res p o n d en t ’ s d et erm in at i o no f wo rk er cl as s ifi cat i o n i n Bl o s s om Day Care Ct rs ., In c. v . Co m

m i s s i o n er, T.C. M em o . 2 0 2 1 -8 6 , fi l edt o d ay .- 5
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[* 5 ] FINDINGS OF FACT I. Pet i t i o ner’ s Back g ro un d Pet i t i o ner i s an Ok l ah o m a co rp o rat i o n , o ri g i n al l y i n co rp o rat edi n1 98 6
. Wh en th e p et i t i o n was fi l ed , p et i t i o n er’ s p ri n ci p al p l ace o f b u s i n es s was i nTu l s a, Ok l ah o m a. Pet i t io ner was a v al i dco rp o rat i o n i nth e St at e o f Ok l ah o m a du ri n g al l y ears ati s s u e. Du ri n g th e y ears ati ss u e p et i t i o n er o p erat edch i l dd ay care cen t ers i n t h e Tu l s a m etro p o l i tan area. Befo re M ay 2 0 0 5 p et i t io n er o p erat edfi ve d ay care
cen t ers , as fo l l o ws : (1 ) 8 0 1 Lo ng St ., San dSp ri n g s , Ok l ah o m a (Lo n g St .); (2 ) 4 7 44 So u th M i n g o Rd ., Tu l s a, Ok lah o m a (M in g o Rd .); (3 ) 8 0 0 No rt h 8 1s tW es tAv e., Tu l s a, Ok lah o m a (8 1 s tW es tAv e.); (4 ) 1 1 50 5 Eas t 7 6 th St
. No rt h , Owas s o , Ok l ah o m a (7 6t h St . No rt h ); an d (5 ) 9 1 35 Eas t6 1 s t St ., Tu l s a, Ok l ah om a (Eas t 6 1 s tSt .). In M ay 2 0 0 5 p et i t i on er o p en eda s i x th l o cat i o n at1 02 0 So u th El m Pl ., Bro k en Arro w, Ok l ah o m a (El m

Pl .). Pet it i o n er o p erat edth e s i x d ay care cen t ers fro m M ay 2 0 0 5 thro u g h th e y ears at i s s u e.- 6
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[* 6 ] II. Th e Hack ers Si n ce 1 9 8 6 an datal l rel ev an tt im es , th e Hack ers were p et i ti o n er’ s o n l y
co rp o rat e o ffi cers an ds o le s h areh o l d ers , wi th M rs . Hack er o wn i n g 5 1 % an dM r. Hack er o wn i n g 4 9 % o f p et it i o n er’ s s t o ck
. M rs . Hack er, wh o h o l d s an as s o ci at e’ s d eg ree i nch i l d d ev el o pm en t, o p en ed p et i t i o n er as an u ni n co rp o rat edb u s i n es s en ti ty i n1 9 8 2 . Si n ce p et i t i o n er’ s i n co rp o rat io n i n 1 9 86 an dth ro u g h th e y ears ati s s u e, M rs . Hack er s erv edas p et i t i o n er’ s p res i d en t, as wel l as i t s d i rect o r o f cu rri cu l u m an dedu cat i o nfo r t h e 9 0
em pl o y ees , s tu d en ts , an ds i x l o cat i o n s . Sh e s erv edas p et i t i o n er’ s t o p m an ag er, p ers o n al l y

o vers eei n g an ds up erv i s i n g em p l o y ees , m ak i n g h i ri ng an dfi ri n g d eci s i o n s , an d m an ag i n g p et i t i o n er’ s s i x d ay care d i rect ors . Al l o f p et i t i o ner’ s
em pl o y ees u l t i m at el y

rep o rt edt o h er. M r. Hack er, al s o s i n ce 1 9 8 6 an dth ro ug h the y ears at i ss u e, s erv edas p et i t i o n er’ s co rp o rat e v i ce p res i d en t , as wel l as i t s s ecret ary an d t reas u rer. Du ri n g th e y ears ati s s u e, M r. Hack er al s o s erv edas p et i t i o n er’ s d irect o r an das i t s d i rect o r
o f acco u nt ab i l i ty

an dfi n an ce. He h adau th o ri ty o ver al l o f p et it i o n er’ s b an k
acco u n t s, an d hi s d ai l y

res p o n s i b i l i t i es i n cl u d edd ep o s i t i n g p aren t s ’ p aym en t s fo r ch i l d care i n t o p et i t i o n er’ s b an kacco u n ts an dp ers o n al l y wri t i n g al l o f t he p ayro ll ch eck s t o p et i t i o n er’ s 9 0 em p l o y ees .- 7
-

[* 7 ] Bo th M r. an dM rs . Hack er were m em b ers o f t he Ok l ah o m a Ch i l d Care As s oci at i o n , an dM r. Hack er was a m em b er o f i ts b o ardfro m

2 0 0 4 th ro u g h 2 0 0 8
. Th i s St at e o rg an i zat io n fo cu s edo nch i ld care i s s u es , wo rk i n g wi th th e Ok l ah o m a Dep art m en to f Hu m an Serv i ces (ODHS) reg ard i n g trai n in g , edu cat i o n , an d
co m m en t s o n reg u l at i on s. Pet i t i o n er’ s d ay care cen ters were l icen s edb y ODHS,
an d th e Hack ers were res p o n s i b l e fo r en s u ri n g th atth e p ro g ram s an dem p l o y ees
m etODHS s t an dard s . Du ri n g th e y ears ati ss u e, M r. an d M rs . Hack er co n tro l ledal l o f p et i t i o n er’ s ch i l d care p o li ci es an dedu cat i o n an dco o rd i n at edal l p h y s i cal l o cat i on an dp ro g ram
m ai n t en an ce d eci s i on s . Th ey b o th act i v el y

p art i ci pat edi np et i t i o n er’ s d ai l y
o p erat i o n , freq u en t l y

wo rk i n g 5 0 t o 6 0 h o u rs p er weekatal l l ev el s , i n cl ud i n g th o s e du t i es d es cri b edab o v e, as wel l as p ap erwo rkan dfro n t o ffi ce du ti es , cl as s ro o m

t each i n g an d s up erv i s i o no f t each ers , p u rch as i n g an d d el i v eri n g fo o d fo r p et i t i o n er’ s ch i l dcare p ro g ram s , an d m ai nt en an ce an dcu s t o d i al du t ies , i f
n eces s ary . Th e Hack ers h av e t hree ch i l dren , s o n s St ev enan d As h l ey , b orn i n1 9 7 5 an d 1 9 7 9 , res p ect i v el y , an dd au g h t er Wh i tney , b orn i n1 9 8 7 (co l l ect i v el y , Hack er ch i l dren ). Th e Hack er ch il dren were n o tp et i t i o n er’ s em p lo y ees .- 8
-

[* 8 ] III. Hack er Co rp . A. Back g ro u n dan d M an ag em en tFees In 2 0 0 2 M r. Hack er i n co rp o rat edth e Hack er Co rp . as an Ok l ah o m a
co rp o rat i o n. Du ri n g al l y ears rel ev an t t o th es e cas es , Hack er Co rp . el ect edt o b e treat ed as an S co rp o rat io n fo r Fed eral i n co m e t ax p u rp o s es . Du ri n g 2 0 0 4 th ro u g h 2 0 0 8 p et i t i o n er m ad e p aym en t s i nth e fo rm o f
m an ag em en tfees t o Hack er Co rp ., wh i ch i ntu rn p ai d wag es t o th e Hack ers an d th ei r ch i l dren fo r s erv i ces th ey ren d eredt o p et i t i o ner. As h ley was a p ai d
em pl o y ee o f Hack er Co rp . fro m 2 0 0 5 th ro ug h 2 0 08 . St ev en was a p ai dem p l o y ee
o f Hack er Co rp . du ri n g 2 0 0 4 an d2 0 0 5 . Fro m J anu ary 2 0 0 6 t o Au gu s t 2 0 0 8 St ev en o p erat eda car s t ereo m o d i fi cat i o nb u s in es s an dwas n o tem p l oy edb y Hack er Co rp . Wh i tn ey

was n ota p ai dem

p l o y ee o f Hack er Co rp . duri n g th e y ears ati ss u e. No wri tt en co n tract o r fee ag reem en twas p rep aredi nco nn ect i o nwi th p et i t i o n er’ s ag reem en twi th Hack er Co rp . B. Real Pro p ert y

Tran s fers Befo re M ay

2 0 0 5 , p et i t i o n er o r t h e Hack ers o wn edthe real p ro pert ies wh ere p et i t i o n er’ s d ay care l ocat i o ns o p erat edas fo l l o ws :- 9
- D ay care l ocat i o n Own er Lo n g St
. an dM in g o Rd
. M r. an d M rs . Hack er 8 1 stW es tAv e. Pet i ti o n er 7 6 th St
. No rt h Pet i ti o n er E as t6 1 stSt
. Pet i ti o n er El m Pl
. Pet i ti o n er In M ay 20 0 5 t i t l e t o each p ro p ert y was tran s ferredb y

qu i t cl ai m

d eedt o Hack er Co rp ., an dth e t ran s fers were reco rd edi nth e Tu l s a Co u n ty l an dreco rd s . Fo l l o wi ng th e t ran s fers , Hack er Co rp . as s u m edp aym en to f th e p ro pert y t ax es an d b eg anm ak i n g p aym en ts o n the m o rt g ag es s ecu ri n g th e p ro p ert i es h el db y Secu ri ty Ban k. Pet i t i on er co n t i nu edt o o p erat e i t s d ay care cen t ers atth e s am e l o cat i o n s . No fo rm al l eas e ag reem en tb etween p et i t i on er an dHack er Co rp . was s i g n ed , b u t p et i t i o n er b eg an m ak i n g ren tp aym en t s ei th er d i rect l y t o Hack er Co rp . o r t o Secu ri ty Ban k o n b eh al f o f Hack er Co rp . i np aym en to f t he m ort g ag es . Beg i n n i n g
o n i t s t ax retu rn fo r 2 0 0 5, Hack er Co rp . cl ai m edd edu ct i o n s fo r d ep reci at i o nwi th
res p ectt o t h e b ui ld i n g s , fo r p aym en to f t h e p ro p erty t ax es , an dfo r i n t eres t p ai di n
co n nect io n wi th th e m ort gag es . [* 9 ]- 1 0 -

[* 1 0 ] IV. Co rp o rat e Sp en di ng A. Cred it CardUs ag e Du ri n g th e y ears ati ss u e p et i t i o n er m ai n t ai n ed an Am eri can Ex p res s (AM EX) cred itcard , acco u n ten d i n g x 4 0 0 1 . Duri n g 2 00 4 th ro u g h 2 0 0 7 M r. an d M rs . Hack er were au th o ri zedu s ers o f t h e cred i tcardacco u n t. Wh i tn ey was ad d ed
as an au th o ri zedu s er i n 2 0 05 an dAs h l ey i n 2 00 6 . In ad d i t i o nM r. Hack er
m ai n t ai n edan AM EX cred itcard , acco u n t en d i n g x 1 0 0 9 , o nwh i ch h e, M rs . Hack er, an dAs h l ey

were au th ori zedu s ers . Beg in n in g i n 2 0 0 7 M r. Hack er al s o
m ai n t ai n eda Ci t i Card s (Ci ti ) cred i tcardacco un t , o nwh i ch h e was th e s o l e
au th o ri zedu s er, an dM rs . Hack er m ai n t ai n eda Ban ko f Am eri ca cred i tcard , o n wh i ch s h e was the s o l e au th o ri zedu s er. Th e Hack ers an dth ei r ch i l dren u s edth e cred i tcard s t o m ak e p u rch as es
n eces s ary t o o perat e t h e d ay care cen t ers , b u t th ey al s o reg u l arl y u s edth em t o p ay p ers o n al ex p en s es . Duri n g 2 0 0 4 th ro u gh 2 0 0 7 th e Hack ers an dth ei r ch i l dren ch arg ed th o u s an d s o f d o l l ars i n p ers o n al ex p en s es o np et i ti o n er’ s cred i t card
acco u n t , as wel l as th e Hack ers ’ AM EX, Ci t i, an d Ban ko f Am eri ca cred itcard s , al l o f wh i ch p et it i on er i n v ari ab l y p ai d . Inad d it i o nt o ro u t i ne p ers o n al p urch as es , s u ch as res tau ran tm eal s , au t o ex p en s es , an dp ers o nal m ed i cal ex p en ses , the Hack ers ei th er u s edth e co rp o rat e cred i tcardt o p ay o r h adp et it i on er p ay

th ei r- 1 1 -

[* 1 1 ] p ers o n al cred i tcard s fo r s u ch ex p en s es as co l l eg e tu it io n , v acat i o n s , jewel ry , an d o ther l ux u ry

i t em s . Th e Hack er ch i ldren co n t in u ed t o m ak e p ers on al p u rch as es wi th th e cred i tcard s ev en du ri n g p eri o d s wh en th ey were n o t em

p l o y ees
o f p et i ti o n er o r Hack er Co rp . B. Veh i cl es Du ri n g th e y ears ati ss u e, M r. Hack er dro v e a 2 0 0 3 Hu m m er as h i s p ers o n al
v eh icl e, wh i l e M rs . Hack er p ri m ari l y u s eda 2 0 0 0 Lex us as h er p ers o n al v eh i cl e. Bo th v eh i cl es were t i t l edi n th e Hack ers ’ n am es , b u t p et i t io n er p ai d th e n o t es o n th e v eh i cl es an d cl ai m edd ep reci at i o n d edu ct i o n s fo r t h em o ni t s t ax retu rn s . In M arch 2 0 0 4 p et it i o n er t rad edi n a Fo rdEx p ed i t i on fo r $ 2 4 ,9 1 9 t o wardth e p u rch as e o f a 2 0 0 4 BM W , wh i ch was t it l edi nSt ev en ’ s n am e. St ev en was th e b o rro wer o n th e car l o an an d u s edth e BM W fo r co m m u t i n g an do th er p ers o n al p u rp os es . Si m i l arl y , b eg i nn i n g i n Ap ri l 2 00 4 As h l ey b eg andri v i n g a 2 0 0 4 Cad il l ac Es cal ad e as h is p ers o n al v eh i cl e. Th e Es cal ad e was t it l edi n As h ley ’ s
n am e an dAs h ley

was th e b orro wer o n t he car l o an . Pet i t i o n er p ai d the n o t es o n b o th St ev en an d As h ley ’ s v eh i cl es an d cl ai m edd ep reci at i o n fo r t h o s e v eh i cl es o n i t s t ax retu rn s . Nei th er t h e Hack ers n or t hei r ch i l dren m ai n t ai n edan y m il eag e l o g s
o r o th er reco rd s o f t h e ex ten t , i f an y , t o wh i ch th ey u s edth e v eh i cl es fo r p et i t i o n er’ s b u si n es s p urp o ses .- 1 2 -

[* 1 2 ] V. Ren t al Pro p ert y In M ay 20 0 5 p et i t i on er p u rch as ed8 39 Kat y St
. , San d Sp ri n g s , Ok l ah o m a (Kat y St .) fro m a th i rdp art y

fo r $ 5 0 ,0 0 0 an dex ecu t eda p ro m i ss o ry n o t e an d
m o rt g ag e o n th e p ro p ert y fo r $ 4 2 ,5 0 0 . Beg i n n i n g i n J u n e o f t h at y ear, p et i t i o n er
ren t edth e p ro p ert y

t o a t en an tan drecei v edm o n th l y ren t p aym en t s . Th e p aym en t s t o t al ed$ 4 ,2 0 0, $ 7 ,2 0 0 , an d$ 6 ,7 6 7 fo r 2 00 5 , 2 0 0 6, an d2 00 7 , res p ect i v el y . Pet i t i o ner d i dn o trep o rt th e Kat y St . p ro p ert y

ren t p aym en t s o ni t s retu rn s . Rat h er, Hack er In v es t m en t , LLC (Hack er In v es t m en t ), rep o rt edth em o n i t s retu rn s . M r. an dM rs . Hack er fo rm edHack er In v es tm en tas an Ok l ah o m a l i m i t ed l i ab i l i ty co m

p an y i n 2 0 02
. Duri n g th e y ears ati ss u e Hack er In v es t m en t was treat ed as a p art n ers h i p fo r Fed eral t ax p u rp o s es , an di t s p ri n ci p al b u s i n es s act i v i ty
was l eas i n g real es tat e. Pet i t i o n er was n ota m em b er o f Hack er In v es t m en t
. VI. Bo o kk eep i n g an dRetu rn Prep arat i o n A. Dep o s i tSu m

m ari es Du ri n g 2 0 0 4 th ro u g h 2 0 0 8 each o f p et i t i o n er’ s d ay care cen t ers m ai nt ai n ed
co m p u t er reco rd s o f p aym en t s recei v edfro m p aren ts . Th e reco rd s were
m ai n t ai n edb y

th e d i rect o r o r as s i s t an td i rect o r o f each d ay care cen t er, wh o
reco rd edeach p aym en tam o u n tan dwh et h er th e p aym en t was b y ch eck , cas h , o r

“ o ther” (e.g ., m o n ey

o rd er). Each d ay care cen t er ran a d ai l y p ri n t o u t o f t h e- 1 3 -

[* 1 3 ] reco rd s, reco n ci ledthe rep o rtwi th th e p aym en t s , an dtran sm i tt edth e rep ort
an d th e p aym en t s t o Mr. Hack er. M r. Hack er wo u l drev i ew an dv eri fy th e i n fo rm at i o n , th en d ep o s itth e ch eck s , m o n ey o rd ers , an da p o rt i o no f t h e cas h i n t o p et i t i o n er’ s b an kacco u n t
. B. Bo o kk eep i n g 1
. Ro b Cro wd er Befo re Decem

b er 2 00 7 p et i t i o n er d i dn o th av e an i n -h o u s e b o o kk eep er. Rat h er, p et i t i o n er en g ag edth e s erv i ces o f W al t ers & Bai l ey , C.P.A., In c. (W al t ers & Bai l ey ) fo r b o o kk eep i n g an dt ax return p rep arat io n . Ro b Cro wd er, a cert i fi ed p ub l i c acco u n tan tp erfo rm i n g in d ep en d en tco n tract wo rkfo r W al t ers & Bai l ey , p rep aredp et it i on er’ s g en eral l ed g ers an dfi n an ci al s t at em en ts , wh i ch wo u l d s erv e
as th e b as i s fo r i t s t ax retu rn s fo r 2 0 0 4 , 2 0 05 , an d 2 0 0 6
. M r. Cro wd er p rep ared p et i t i o n er’ s g en eral l ed g ers an dfi n an ci al s t at em en t s
u s i n g i n fo rm at i o n the Hack ers p ro v i d ed . Th ey g av e h im b an ks t at em en ts fro m p et i t i o n er’ s o p erat i n g , p ayro ll , an dl o an acco u nt s b u t fai l edt o p ro v i d e an y reco rd s rel at i n g t o u n d ep o s it edcas h o r o th er p aym en t s . Th e Hack ers al so p ro v i d edcred i t cards t at em en t s fo r t h e AM EX cred i tcardacco u n ts en d i n g x 1 00 9 an dx 40 0 1 b u t d i dn o t p ro v i d e M r. Cro w d er wi th an y g u id an ce as t o wh i ch ex p en d i tu res were b u s i n es s ex p en s es an d wh i ch were p ers o n al . Al th o u gh th e Hack ers an dth ei r- 1 4 -

[* 1 4 ] ch il dren u sed th e cred i tcard s fo r b o th b u si nes s p u rch as es an dp ers o n al
ex p en d i tu res , th e Hack ers d i dn o tcat eg o ri ze t h ei r b u si n es s ex pen s es o r n o t at e t h e
s t at em en t s t o i nd i cat e wh i ch p u rch as es were p ers o n al . Si m i larl y , th e ch eck s refl ect edo n p et i t i o ner’ s b an ks t at em en t s were n o t co dedas t o wh et her t h ey rel at ed t o a b u si n es s ex p en s e o r a p ers o n al ex p en se. Des p i t e t h e l acko f g u i d an ce fro m the Hack ers , M r. Cro wd er d et erm i n ed th atm an y o f t he ex pen s es o n the cred itcards t at em en t s were p ers o n al , an d u s eda g en eral l ed g er acco u n ten t i t l ed“ A/ R - Offi cer” as a cat ch -al l fo r cred i tcard ch arg es th at h e d et erm in edwere t h e Hack ers ’ p ers o n al ex p en ses . Fro m 2 0 0 4 t o 2 0 0 6 p et i t i o n er’ s “ A/ R - Offi cer” g en eral l ed g er acco un t i n creas ed fro m $ 2 0 8 ,7 7 6 .2 2 t o $ 1 ,3 7 9 ,4 0 8
. 3 0 b as edp ri m ari l y o nacco u n to f ch arg es t o th e AM EX cred i tcard s . 2
. Bo n n i e Ki n g In Decem b er 2 0 07 p et it i o n er h i redBo n n i e Ki n g t o p erfo rm i n -h o u s e b o o kk eep i n g an dacco u n t in g fu n ct i o n s , i n cl u di n g the p rep arat io n o f i t s g en eral l ed g er an dfi n an ci al s t at em en t s fo r 2 0 0 7. M s . Ki n g p rep aredth e g en eral l ed g er
u s i n g p et i t i o n er’ s 2 0 0 7 b an k s tat em en t s fro m i t s o p erat i n g , p ay

ro l l , an dl oan
acco u n t s, b u t , as wi th Mr. Cro w d er, t h e Hack ers d i dn ot p ro v i d e an y i nfo rm at i o n reg ard i n g th e u n d ep o s it edcas h o r o th er p aym en ts . M s . Ki n g p rep ared g en eral- 1 5 -

[* 1 5 ] l ed g ers th ati n cl u d edthe p o s t i n g o f p aym en t s o f ch arg es o n the t wo AM EX cred i tcardacco u nt s, as wel l as th e Ban k o f Am eri ca cred itcardan dth e Ci t i cred i t card . Th e Hack ers d i dn o tn ot at e wh i ch ex pen d i tu res were p ers o n al an d wh i ch were b u s in es s . M s . Ki n g p o s t edth e m ajo ri ty o f t h e cred i t cardex p en d itu res t o p et i t i o n er’ s g en eral l ed g er Sup p l i es acco u n t an d t h e rem ai nd er t o Fo odan d Act i v i t i es . Li k e M r. Cro wd er, M s . Ki n g p os t ed i nth e “ A/ R - Offi cer” acco u n t th o s e ex p en ses thatap p eared t o b e p ers o n al
. C. Retu rn Prep arat i o n Pet i t i o ner’ s 2 0 0 4 th ro u g h 2 0 0 7 t ax retu rn s were p rep aredb y W al t ers & Bai l ey . Ty

p i cal l y , each retu rn was p rep aredb y M i ch ael Bai l ey an drev i ewedb y Pat ri ck W al t ers , wh o wo u l dm eetwi th M r. Hack er t o s ig nth e return . M r. Bai l ey
wo u l dp rep are t h e ret u rn s u s i n g th e g en eral l ed g ers an dfi nan ci al s t at em en t s M r. Cro w d er o r M s . Ki n g p rep ared . Th e ret u rn s W al t ers & Bai l ey p rep aredcl ai m ed d educt i o n s fo r t he ex pen s es as p o s t ed i n p et i t i o n er’ s g en eral l ed ger an d rep o rt ed
am on g i t s Cu rren t As s et s o n Sch edu l e L, Bal an ce Sh eet s p er Bo o k s , at t ach edt o i t s Fo rm 1 1 2 0 , U.S. Co rp orat i o n In co m e Tax Retu rn , “ No t e Rec Offi cer” t h e am o u n t s b el i ev edt o b e p ers o n al ex p en d i tu res . Th e Hack ers n ev er m ad e an y rep aym en to f th e am o un td es i g nat edas a l oan n o r d i d p et i t io n er p ay the Hack ers an y

wag es o r- 1 6 -

[* 1 6 ] s al ary , an d t h e rep o rt edam o u n ti n creas ed fro m $ 2 3 6 ,1 8 9 atth e b eg i n n i n g o f 2 0 0 4 t o $ 1 ,3 3 2 ,0 6 6 atth e en d o f 2 0 0 7
. 5 Pet i t i o ner fi l edi ts i n co m e t ax return s fo r 2 0 0 4 , 2 0 0 5 , 2 0 0 6, an d2 00 7 , o n Sep tem b er 1 5 , 2 0 0 5; Sep t em

ber 1 5 , 2 0 0 6 ; Sep t em

b er 1 5 , 2 0 0 7 ; an d Oct ob er 2 7 , 2 0 0 8 , res p ect i v el y . VII. Ex am in at i o n Res p o n d en tex am i n edp et i t i o n er’ s t ax retu rn s fo r 2 00 4 , 2 0 0 5 , 2 0 0 6 , an d 2 0 0 7 i n an ex am i n at i o n th atal so co v eredth e Hack ers ’ p ers on al t ax retu rn s fo r 2 0 0 4 thro u g h 2 0 0 8 an dp et it i o n er’ s wo rk er cl as s ifi cat i on o f t h e Hack ers fo r 2 0 0 5 th ro u g h 2 0 0 7 . Beg in n i n g i n M arch 2 00 8 , a t i m el y s eri es o f Fo rm s 8 7 2 , Co n s en tt o Ex t en dthe Ti m e t o As s es s Tax , were s ubs equ en tl y ex ecu tedo nb eh al f o f p et i t i o n er fo r 2 0 04 , 2 0 0 5 , 2 0 06 , an d2 0 0 7. Aft er a l en gt h y ex am i n at i o n , res p o n d en t d et erm i nedd efi ci en ci es o f $ 7 0,2 3 9 , $ 1 0 9 ,8 1 3 , $ 1 09 ,5 5 7 , an d $ 1 3 0 ,9 6 7 fo r 2 0 0 4, 2 00 5 , 2 0 0 6, an d2 0 0 7 , res p ect i vel y . Th e d efi ci en ci es were b as edo n th e fo ll o w i ng ad j u s t m en t s:

5 Th e d i fferen ce b et ween th e t h e $ 1 ,3 7 9 ,4 0 8 “ A/ R - Offi cer” s h o wno n p et i t i o n er’ s g en eral l ed g er an d th e $ 1 ,3 3 2 ,0 6 6 s h areh o l der l oan rep o rt edo n p et i t i o n er’ s 2 0 06 retu rn s t em s fro m a b oo kad

ju st m en t . Th e Hack ers d i d n o tm ak e an y p aym en t t o wardthe rep o rt edb al an ce.- 1 7 - It em 2 0 0 4 2 0 0 5 2 00 6 2 0 0 7 a. Ren t al ex p en s es --- $ 13 6 ,6 5 2
--- --- b . Dep reci at i o n $ 5 6 ,3 7 4 2 6 ,7 0 8 $ 2 0,8 2 0 $ 5 1 ,4 1 5 c. M an ag em en tfees 1 8 7 ,5 0 0 8 4 ,2 5 0 6 7 ,7 8 4
--- d . Co m p en s at i on o f o ffi cers --- --- 1 0 0,0 0 0
--- e. Gro s s recei p t s (2 0 3 ,6 5 9 ) (3 1 4 ,7 9 7 ) 1 6 0,7 0 1 1 8 ,8 8 8 f. In teres tex pen s e 1 2 ,9 1 7 (4 3 ,2 4 5 ) 1 7 ,9 6 3 1 7 ,3 5 9 g . Ren t al p ro fi t -- Kat y St
. --- 2 ,9 97 5 ,2 8 4 4 ,8 5 1 h . Leg al an dp ro fes s i o n al

--- --- 2 ,0 0 0
--- i . Rep ai rs an d m ai n t en an ce 1 ,6 7 4 3 8 ,7 7 5 2 3 ,9 4 6 2 7 ,7 0 0 j. W ag e redu ct i o n fo r In d i anem

p l o ym en t cred i t (2 6 ,4 0 0 ) (2 4 ,2 5 9 ) (3 9 ,2 8 3 ) (3 1 ,7 5 2 ) k . W ag es t o s h areh o l ders (1 9 8 ,7 4 0 ) (2 0 9 ,2 0 0 ) (2 2 0,2 1 0 ) (2 3 1 ,8 0 0 ) l . No nb u s i n es s d edu ct ed ex p en s es 2 7 8 ,5 5 6 3 6 0 ,4 0 5 4 8 ,3 2 4 2 1 ,8 3 0 m . In t eres ti n co m e --- --- (7 3 ,6 3 8 ) (7 5 ,7 9 6 ) n . Supp l i es --- --- --- 4 3 6 ,4 0 8 o . Sal e o f p ro p ert y

-- Sch . D 5 8 ,9 8 0 1 2 8 ,4 6 8
--- --- p . Co nt ri b u t i on s 2 ,2 6 6
--- --- --- q . Ban kch arg es --- --- --- 1 ,5 5 1 r. In su ran ce ex pen s es --- --- --- 1 4,5 0 6 To t al ad j u s t m en t s 1 6 9 ,4 6 8 1 8 6 ,7 5 4 1 1 3,6 9 1 2 5 5 ,1 6 0 [* 1 7 ]- 1 8 -

[* 1 8 ] In ad d i t i o n res p on d en t d et erm i n edci vi l frau dp en al ti es u nd er s ect i o n6 6 6 3
o f $ 5 2,6 7 9 .2 5 , $ 8 2,3 5 9.7 5 , $ 8 2,1 67 .7 5 , an d$ 9 8 ,2 25 .2 5 fo r t h e y ears ati s su e. Res po n d en tad d i t io n al l y

d et erm i n edth atp et i t i on er i s l i ab l e fo r an ad d i t i o n t o t ax p u rs u an t t o s ect io n 6 65 1 (a)(1 ) fo r 2 0 0 7 o f $ 32 ,7 4 1
. 7 5. Res p o n d en ti s su edth e n o t i ce o f d efi ci en cy o n No v em

b er 1 4 , 2 0 11 , an d p et i t i o n er t i m el y

fi l edth e p et i ti o nd o ck et edas No . 3 8 6 8 -1 2
.

OPINION I. Bu rd en o f Pro o f Gen eral ly , th e Co m

m i s s i o n er’ s d et erm i n at i o n s s etfo rt h i na n ot i ce o f d efi ci en cy

are p res u m edco rrect , an dth e t ax p ay er b ears th e b u rd en o f s h o wi n g th e d et erm i n at i o n s are i n erro r. Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). Wh en , as h ere, a cas e i n v o l v es u n rep o rt edi n co m e, t h e U.S. Co urto f Ap p eal s fo r t h e Ten th Ci rcu i t , t o wh i ch th i s cas e wo u l d b e ap p eal ab l e ab s en ta
s t ip u l at i o n t o th e co n trary , s ee s ec. 7 4 8 2 (b ); Go l s en v . Co m m i s s i o n er, 5 4 T.C. 7 4 2, 7 5 7 (1 97 0 ), aff’ d, 4 4 5 F.2 d9 8 5 (1 0 th Ci r. 1 9 7 1 ), h as h el dth at the Co m m i ss i o n er’ s d et erm i n at i o n o f u n rep o rt edi n co m e i s en t i t l edt o a p res u m p t i o n o f co rrect n es s
o n ce s om e s ub st an t i v e ev i d en ce i s i n tro du cedd em o n s trat i n g th atthe t ax p ay er recei v edu n rep o rt edi n co m e, Un i t edSt at es v . M cM u ll i n , 9 4 8 F.2 d1 1 8 8 , 1 19 2 (1 0 th Ci r. 1 9 9 1 ). On ce t h e Co m m i s s i o ner i nt ro du ces s o m e s ub s t an t i v e ev i d en ce- 1 9 -

[* 1 9 ] l i n k i n g th e t ax p ay er t o the i nco m e, th e p res u m p t i o no f co rrect n es s ap p l i es , an d th e b u rd en s h ift s t o t h e t ax p ay er t o p ro du ce s ub s t an t ial ev id en ce o v erco m i n g i t
. Id
. II. Ad ju s t m en t s t o Gro s s Recei p t s Res p o n d en td et erm i n edth at p et i t i o n er h adu n rep o rt edg ro s s recei p t s o f $ 1 6 0 ,7 0 1 an d$ 1 8 ,8 8 8 fo r 2 0 0 6 an d2 0 07 , res pect i v el y . Res p o nd en tad d i t i o n al l y d et erm i n edth atp et i t i o n er i s en t i t l edt o d own w ardad ju s tm en t s o f $ 2 03 ,6 5 9 an d $ 3 1 4 ,7 9 7 t o i t s g ro s s recei p t s fo r 2 0 0 4 an d2 0 0 5 , res pect i v el y . Gro s s i n co m e m ean s al l i n co m e fro m wh at ev er s o u rce d eri v ed , i n cl u d i n g i n co m e d eri v edfro m

b u si n es s . See s ec. 6 1 (a)(2 ). Gro s s i n co m e i s co n st ru ed b ro ad l y t o i n cl u de al l “ acces s i on s t o weal th , cl earl y real i zed , an do v er wh ich th e t ax p ay ers h av e co m

p l et e d o m i n i o n .” Co m

m i s s i o n er v . Gl en s h aw Gl as s Co ., 3 4 8 U.S. 4 2 6 , 4 3 1 (1 9 5 5 ). Ev ery p ers o ns ub

jectt o i n co m e t ax i s req u i redt o m ai n t ai n b o o k s an dreco rd s s u ffi ci en tt o es t ab l i s h the am o u nto f g ro s s i nco m e an d d educt i o n s s h o wnb y

th atp ers o n o nh i s o r h er i n co m e t ax retu rn . See s ec. 6 0 0 1 ;
s ec. 1 .6 0 01 -1 (a), In co m e Tax Reg s . Ban kd ep o s i t s are p ri m a faci e ev i den ce o f i nco m e. To k ars k i v . Co m m i s s i o n er, 8 7 T.C. 7 4, 7 7 (1 9 8 6 ); Bo l l es v . Co m m i ss i o n er, T.C. M em o . 2 0 1 9 -4 2 , at* 1 4. Th e b an k d ep o s i ts m et h o do f p ro of as su m es th atal l d ep o s i t s i n t o- 2 0 -

[* 2 0 ] a t ax pay er’ s b an k acco u n tdu ri n g a g i v en p eri o dco n st i tu t e t ax ab le i n co m e
u n l es s th e t ax p ay er can s h o w th atth e d ep o s i t s are n o n tax ab l e. Cl ayto nv . Co m m i s s i o n er, 1 0 2 T.C. 6 3 2 , 6 4 5 (1 9 9 4). Th e Go vern m en tm u s t t ak e i nt o
acco u n t an y

n o n t ax ab l e s ou rce o r d edu ct i b l e ex p en se o f wh i ch i t h as kn o wl ed g e. Di Leo v . Co m

m i s s i o n er, 9 6 T.C. 8 5 8 , 8 6 8 (1 9 9 1 ), aff’ d , 9 5 9 F.2 d1 6 (2 dCi r. 1 9 9 2 ). Oni t s retu rn s p et i t i o ner rep o rt edg ro s s recei p t s fro m i t s d ay care cen t ers o f $ 2 ,4 7 3 ,1 1 8 , $ 2 ,8 6 4 ,2 3 9 , $ 2 ,7 6 6 ,2 4 7 , an d$ 2 ,7 1 8,7 9 6 fo r 2 0 0 4 , 2 0 0 5 , 2 0 0 6 , an d 2 0 0 7 , res p ect i v el y . Rev en u e Ag en tFl oy d (RA Fl o y d ) co ndu ct eda b an kd ep o s i ts
an al y s i s o f p et it io n er’ s b an k acco u n t s an dco n cl ud ed th at , aft er t ak i ng i n to acco u n t tran s fers an dfu n ds fro m

n o n t ax ab l e s o urces , p et it i o n er’ s n ett ax ab l e d ep o s i t s t o t al ed$ 2 ,2 2 2,0 1 1.0 1 , i n cl u d i n g cas h d ep o si ts o f $ 2 ,6 4 1 , fo r 2 0 0 4 ; $ 2 , 4 9 4,6 0 2 .7 7 , i n cl u d i n g cas h d ep o s i t s o f $ 23 , 9 8 4, fo r 2 0 0 5 ; $ 2 , 8 4 0 ,7 1 8 .9 9 , i n cl u d i n g cas h d ep os i t s o f $ 4 ,9 8 5 , fo r 2 0 0 6 ; an d$ 2 ,7 3 7,6 8 4 .3 7 , i n cl u d i n g cas h d ep o s i t s o f $ 5 ,1 8 0 , fo r 2 0 0 7
. Becau s e p et i t i o n er’ s return s were p rep areds o l el y o n t h e b as i s o f p et i t i o n er’ s b an k s tat em en t s , RA Fl o y dco m p aredth e cas h am o un t s d ep o s i t edi n t o p et i t i o n er’ s b an k acco u n t s ag ai n s tth e t o tal d ep o s i ts u m m ari es . On the b as i s o f d i s crep an ci es b et ween cas h recei v edan d cas h d ep o s i ted , RA Fl o y dfo u n dth at M r. Hack er fai l ed- 2 1 -

[* 2 1 ] t o d ep o s i t cas h p aym en t s t o t al i n g $ 47 ,4 4 8 .3 1 , $ 5 4 ,8 3 9.2 5 , $ 86 ,2 2 8
. 7 4 , an d $ 8 8 ,7 6 7 .7 8 fo r 2 0 0 4 , 2 0 0 5, 2 0 0 6 , an d 2 0 0 7 , res p ect i v el y . Pet i t i o ner d o es n o targ u e th at res p on d en t ’ s u s e o f t h e b an k d ep o s i t s an al y s i s i s erro neo u s o r t h atan y s peci fi c d ep o s i t i n cl u d edi n res po n d en t ’ s d et erm i n at i o n
was fro m a n o n t ax ab l e s o u rce. No r d o es p et i t io n er d i s p u t e t h ati trecei v ed
u n d ep o s i t edcas h p aym en t s . Attri al M r. Hack er t es t i fi edth ath e d idn o tb el i ev e th atth e t o t al d ep o s i t s umm ari es were rel i ab l e, ci t i n g th e p o s s i bi l i ty o f dup l i cat e
en tri es o r m is l ab el i n g cas h as ch eck s o r v i ce v ers a. Th ree o f p et i t i o ner’ s d ay care
cen t er d i rect ors t es t i fi ed , h o wev er, ab ou tth e p ro cedu res an d s afeg u ard s th e
co m p an y fo l l o wedt o en s u re th e accu racyo f t h e d ai l y d ep o s i ts u m

m ari es an dth at th e en tri es m at ch edth e am o u n t s actu al l y recei v ed . Pet i t io n er d o es n o ti d en t i fy an y
s p eci fi c erro neo u s en try th at s ho u l dn o tb e i n cl ud edi ng ro s s recei p t s . In s u m m ary , res po n d en t d et erm i n ed th atp et it i on er o v errep o rt ed g ro s s recei p t s fo r 2 0 0 4 an d2 0 0 5 b u tal s o u n d errep o rt edcas h recei v edth e s am e y ears , fo r a n etd ecreas e o f $ 20 3 ,6 5 9 fo r 2 0 0 4 an d $ 3 1 4 , 7 97 fo r 2 00 5
. Res po n d en tal s o d et erm i n edth atp et i t i o n er u n d errep o rt edg ro s s recei p t s fo r 2 0 06 an d2 0 07 an d
u n d errep o rt edcas h recei v edfo r an i ncreas e o f $ 1 6 0,7 0 1 fo r 2 0 0 6 an d$ 1 8 , 8 8 8 fo r 2 0 0 7 . Th e Co urt h o l d s th atp et i t i o n er h as fai l edt o s at is fy i t s b u rd en o f p ro o f. Res po n d en t ’ s ad

ju s t m en t s t o p et i t i o ner’ s g ro s s recei p t s are s u s t ai n ed
.- 2 2 -

[* 2 2 ] III. Cap i t al G ai n Ad ju s t m en t s A. 2 00 4 Ad

ju s t m en t s Res p o n d en td et erm i n edan i n creas e i np et i ti o n er’ s cap i t al g ai n i n co m e fo r 2 0 0 4 o f $ 5 8 ,9 80 . Of th atam o u n t , $ 3 9 , 6 7 6 rel at es t o recap tu re o f p ri o r-y ear ex ces s d ep reci at i o n o n two v eh icl es , a 2 0 02 Ni s s an an da 2 0 0 3 Hu m m er, an d$ 1 9 , 3 0 4 rel at es t o g ai n o n th e t rad e-i n o f a Fo rdEx ped it i o n .

1
. Recap tu re o f Ex ces s Dep reci at i o n 6 Sect io n 1 6 7 (a) al l o ws as a d ep reci at io nd edu ct i o n a reas o n ab le al l o wan ce fo r t h e ex h au s t i on , wear, an dt ear (i n cl u d i n g a reas o n ab l e al l owan ce fo r
o b s o les cen ce) o f p ro p erty u s edi na t rad e o r b us i n es s o r h el d fo r t he p ro du ct i o n o f i n co m e. Sect i o n 1 6 8 (a) s p eci fi es th atthe am o u ntal l owedas a d ep reci at i o n d educt i o n u n d er s ect i o n 1 6 7 (a) i s d et erm i nedb y u s i n g the ap p li cab le d ep reci at i o n
m et h o d, th e ap p l i cab l e reco v ery p eri o d , an d t h e ap p l icab l e co n v en t i o n . Sect io n 2 8 0 F l i m i t s th e al l o wab l e d ep reci at i o nd edu ct i on wh ere l i s t ed p ro p erty , i n cl u d i n g an y

p as s en g er au t o m o b il e o r an y o ther p ro p erty

u s ed as a
m ean s o f t ran s po rt at i o n , i s n ot p red o m i n an t l y u s edi n a qu al i fi edb u si n es s u s e. Sec. 2 8 0F(b )(1 ), (d )(4 )(A)(i ) an d(i i ). As a g en eral ru l e, wh ere an y l i st edp ro p ert y

6 Res p o n d en tch aract eri zes th e d ep reci at i o n recap tu re as cap i t al g ai ni n co m e, an d p et i t i o n er d oes n o td i s p u t e t h atch aract eri zat i o n . Th e Co u rtp ro ceed s acco rd i n g l y .- 2 3 -

[* 2 3 ] i s n o tp red o m i n an t ly u s edi na qu al i fi edb us i n es s u s e fo r t h e t ax ab l e y ear, th e g en eral d ep reci at i o n m et h o do f s ect i o n1 68 (b )(1 ) (i .e., d o ub l e d ecl i n i n g,
s wi t ch i n g t o s trai g h tl i n e d ep reci at i o n ) i s n o t u s ed . See s ec. 2 80 F(b )(1 ). Rat h er, th e al t ern at i ve d ep reci at i o n s y s t em o f s ect i o n 1 6 8 (g ) (i .e., th e s trai g h t -l i ne m et h o d ) i s u s edt o co m

p u t e t h e al l o wab l e d ep reci at i o n d edu ct i o n . See s ecs . 2 8 0 F(b )(1 ), 1 6 8 (g )(1 ) an d(2 ). M o reo v er, wh ere t h e qu al i fi ed b u s i n es s u s e o f an y l i s t ed p ro p erty fal l s t o 5 0 % o r l es s , th e t ax p ay er i s req u i redt o i n cl u d e ex ces s d ep reci at i o n i n g ro ss i n co m e (recap tu re) fo r t h e t ax ab l e y ear i nwh ich th e p ro p ert y i s fi rs t n o tp red o m i n an t l y u sedi na qu al i fi edb u s i n es s u s e. Sec. 2 8 0 F(b )(2 )(A). Th e t erm “ ex ces s d ep reci at i o n ” m ean s t h e ex ces s , i f an y , o f (1 ) t h e am o u n to f d ep reci at i o n d edu ct i o n s al l owedwh en th e p ro p ert y was p red o m in an t l y u s edi n a qu al i fi edb u s i n es s u s e o v er (2 ) t h e am o u n to f d ep reci at i o n d edu ct i on s th atwo u l d h av e b een al l o wedi f t h e p ro pert y h adn o tb een p red o m i n an t l y u s edi na qu al i fi ed b u s i n es s u s e fo r t he t ax ab l e y ear i nwh ich i t was p laced i n s erv i ce. Sec. 2 8 0 F(b )(2 )(B). Pro p ert y

i s treat edas p red o m i n an t ly u s edi na qu al i fi ed b u s i n es s
u s e i f t he b u si nes s u s e fo r t h e y ear ex ceed s 5 0 %. Sec. 2 8 0 F(b )(3 ). Th e t erm

“ qu al i fi edb u s i n es s u s e” g en eral l y m ean s an y

u s e i nth e t ax p ay er’ s trad e o r b u s i n es s . Sec. 2 8 0 F(d )(6 )(B).- 2 4 -

[* 2 4 ] Onth e d ep reci at i on s ch edu l e at t ach edt o p et i ti o n er’ s 2 0 0 4 Fo rm 1 1 2 0 , p et i t i o n er cl ai m edd ep reci at i on d edu ct io n s fo r a 2 0 0 2 Ni s san an da 2 00 3 Hu m m er, b o th o f wh ich are ei th er a p as s en g er v eh i cl e o r o th er p ro p ert y u s edas a m ean s o f tran s po rt at i o n an dth erefo re l i st ed p ro p ert y u nd er s ect i o n 2 8 0 F(d )(4 )(A). Res po n d en td et erm i n edth at , p u rs u an tt o s ect i o n 2 80 F(b ), p et i t i o n er was en t i t l edt o
s trai g h t -l i n e d ep reci at i o n d edu ct i o n s o f $ 2 ,2 0 0 an d $ 5 ,5 0 0 i nco n n ect i on wi th th e 2 0 0 2 Ni s s an an dth e 2 0 0 3 Hu m m er, res p ect iv el y , fo r 2 0 04 b ecau s e p et i t i o ner d i d
n o tu s e t h e v eh i cl es p red o m i nan t l y i na qu al i fi edb u s in es s u se. Pet i t i o n er rep o rt ed p ri o r-y ear d ep reci at i o n d educt i o n s o f $ 1 0 , 7 1 0 i n co n n ect i o nwi th a 2 0 0 2 Ni s s an
an d $ 3 6 ,6 6 6 rel at i n g t o a 2 0 0 3 Hu m m er, 7 b ot h o f wh ich were p u ti n t o s erv i ce i n 2 0 0 3 . Acco rd i n g ly , res p o n d en td et erm i n edex ces s d ep reci at i o nfo r 2 00 4 o f $ 8 ,5 1 0
an d $ 3 1 ,1 6 6 , fo r t h e 2 0 0 2 Ni s san an dth e 2 0 0 3 Hu m m er, res p ect i v el y . Pet i t i o ner d i dn o ti n tro du ce an y ev i d en ce t h atei th er t h e 2 0 0 2 Ni s s an o r t h e 2 0 0 3 Hu m

m er was p red om i n an t l y

u s edi n a qu al ifi edb u s in es s u s e du ri ng 2 0 0 4
. Pet i t io n er cl ai m ed1 0 0 % b u s in es s u s e fo r t he 2 0 0 3 Hu m m er. At tri al , h o wev er, M r. Hack er t es t ifi edth ath e u s edth e 2 0 0 3 Hu m m er du ri n g th e y ears ati s s u e fo r
co m m u t i ng an do th er p ers o n al p u rp o s es . No ev i d en ce was i nt ro ducedt o

7 Pet i t i on er’ s cl ai m ed d ep reci at i o nrel at i n g t o th e 2 0 0 3 Hu m m er i n cl u d ed $ 2 7 ,5 0 0 i n b o n u s d ep reci at i o n p u rs u an tt o s ec. 1 6 8 (k )(4 ).- 2 5 -

[* 2 5 ] d em on s trat e wh at p ercen t ag e o f M r. Hack er’ s u s e o f th e v eh i cl e was fo r a qu al i fi edb u s i n es s u s e, rat h er t han p ers o n al u s e. No r d i dp et i t i o ner s ub m i tan y
ev i d en ce t h atth e 2 0 0 2 Ni ss an was p red o m i nan t l y u s ed i n a qu al i fi edb u s i nes s u s e. Acco rd in g ly , res p on d en t’ s d et erm i n at i o n wi th res pect t o th e v eh i cl es i s s us t ai n ed
.

2
. Veh i cl e Trad e-In Res p o n d en tad d i t io n al l y

d et erm i n ed th atp et i t i on er fai l edt o rep o rt cap i t al g ai n o f $ 1 9 ,3 0 4 i n co n n ect i o n wi th th e trad e-i no f a Fo rdEx p ed i t i o n . Sect io n 3 1 1 (a) g en eral l y

p ro v i d es th atn o g ai no r l o s s s hal l b e reco g n i zedb y
a co rp o rat i o n o n the d is tri b u ti o n o f p ro p ert y . Wh ere a co rp o rat i o n d i s tri b u t es ap p reci at edp ro p ert y

t o a s h areh o l d er, h o wev er, s ect i o n3 1 1 (b )(1 ) p ro vi d es th atth e
co rp o rat i o n reco g ni zes g ai n as i f t h e p ro p ert y were s o l dt o t h e s h areh o ld er ati t s fai r m ark etv al u e. See, e.g ., Bro s s Tru ck in g , In c. v . Co m m is s i o n er, T.C. M em o . 2 0 1 4 -1 0 7 , at* 15 . Gai n i s reco g n i zedt o the ex t en tth atth e p ro p ert y ’ s fai r m ark et
v al u e ex ceed s th e co rp o rat i on ’ s ad ju s t edb as is . Sec. 3 1 1(b )(1 ); s ee al s o Bro s s Tru ck i n g, In c. v . Co m

m i s si o ner, at * 1 5
. In 2 0 0 4 p et i t i o n er trad edi nth e Fo rdEx p ed it i o nt o ward a 2 0 0 4 BM W wi th a trad e-i n val u e o f $ 24 , 9 1 9
. Th e BM W an d t h e l o an were i nSt ev en Hack er’ s n am e,
an d h e u s edi tas h is p ers o n al v eh i cl e. Res p o n den td et erm i n edthatth e t rad e-i n- 2 6 -

[* 2 6 ] co ns t i tu t ed a d is tri b u t i on t o s h areh ol d ers an do nth e b as i s o f a rep o rt edb as i s
o f $ 5 , 6 1 5 , cal cu l at edth e g ai n o n th e t rad e i nt o b e $ 1 9,3 0 4
. Pet i t i o ner d i s ag rees wi th res p o n den t ’ s d et erm i n at i o nb u t o ffers n o arg u m en t
o r ev i d en ce i n s up p o rto f i t s p o s i ti o n . Pet i t io n er h as n o td em o n s trat edth atth e trad e-i n val u e o f t h e Fo rd Ex p ed i t i o nwas l es s th an res p o n den t ’ s d et erm i n at i o n , o r th atp et i t i o n er’ s ad

j u s t edb as i s i nth e Fo rdEx p ed i t io nwas g reat er. Pet i t i o ner h as
n o ti n tro du cedan y

ev i d en ce t o s h o w th atth e t rad e-i no f t h e Ex p ed i t i o nfo r t h e 2 0 0 4 BM W , wh i ch was t i t ledi n St ev en ’ s n am e an du s edex cl u s i v el y b y h i m , was
n o ta d is tri b u t i o n . Res p on d en t ’ s ad ju s t m en ti s s u s tai n ed
. B. 2 00 5 Ad

ju s t m en t-- Real Pro p erty Tran s fers Res p o n d en td et erm i n edth at p et i t i o n er fai ledt o rep o rtcap i t al g ai n i n co m e
o f $ 1 28 ,4 6 8 o n t h e t ran s fer o f real p ro p ert y t o Hack er Co rp . i n2 0 0 5 . Befo re t h e tran s fers , p et i ti o ner o r t h e Hack ers o wn edth e s ix p ro p ert i es o nwh i ch p et i ti o n er
o p erat edi t s d ay care cen t ers . InM ay 2 0 0 5 p et i t i o n er an d t h e Hack ers tran s ferred th o s e p ro p ert i es b y qu i t cl ai m d eedt o Hack er Co rp . Res p o n d en td et erm i n edth at th e t ran s fer co n s t i tu t eda d i s tri b u t i o no f p ro p erty t o s h areh o l d ers an d , p u rs u an tt o
s ect i on 3 1 1 (b )(1 ), p et i t i o n er m u s t reco g n i ze g ai nt o the ex t en tth atth e fai r m ark et
v al u es o f t he p ro p ert i es ex ceed p et i t i o n er’ s ad ju st edb as es i nth e p ro p ert i es .- 2 7 -

[* 2 7 ] Th e Co u rts u s tai n s res p on d en t ’ s d et erm i n at i o ni n p art . W i th res p ectt o th e Lo n g St . an d M i n go Rd . p ro pert i es , th e Co u rtfi n d s thatn o p ro p ert y d i st ri bu t i o n
o ccu rredb ecau s e p et i t io n er n ei th er d i rect l y o wn ed th o s e p ro pert i es n o r at tem p t ed t o tran sfer t h em . Rat h er, th e Tu l s a Co u n ty p ro p ert y reco rd s s h o wth at M r. an d M rs . Hack er, as i n d i v i du al s , h el dt it l e t o the M i n g o Rd . p ro p ert y fro m J u n e 1 9 9 6
u n t i l th ey ex ecu t ed th e qu i t cl ai m

d eedt o Hack er Co rp . i n M ay 2 0 05 . Si m i l arl y , M r. an dM rs . Hack er, as i nd i v i du al s , were t h e o wn ers o f t h e Lo n g St . p ro p ert y , an d th ey tran s ferred i tt o Hack er Co rp . Th e Hack ers , an dn o t p et i ti o n er, tran s ferred the p ro p ert ies t o Hack er Co rp ., an d th e d eed s o f t ran s fer are s i gn ed i n th ei r i n d i v i du al cap aci ti es . Sect i o n3 1 1 i s i n ap p l i cab le. Th e Co u rtn o w tu rn s t o th e rem ai ni ng fo u r p ro p ert i es . Pet i t i o ner co n t en ds th atn o g ai n o r l o s s s ho u l d be reco g n i zedb ecau se each tran s fer was “ a t ran s fer o f

‘ bare n ak edt i t le’ o nl y ” wi th p et i t i o n er “ ret ai n i n g m o s t , i f n otal l o f t h e b en efi t s
an d b u rd en s o f o wn ers h ip o f t he real p ro p ert y .” Acco rd i n g t o p et i t i o n er, “ [a] l eg al
o r eq u it ab l e t ran s fer o f b u i l d in g s fro m Bl os s o m t o Hack er Co rp o rat i o n d i dn o t
o ccu r” an d“ th e arran g em en tb et ween Bl o s s o m an dHack er Co rp o rat i on wo u l dn o t wi th s t an ds cru ti n y un d er t h e Ok l ah o m a Un i fo rm Frau du l en tTran s fer Act * * * n o r th e s cru t i n y

o f t h e In tern al Rev en u e Serv i ce i n a co l l ect i o n act i o n . ”- 2 8 -

[* 2 8 ] Pet i t i o ner’ s arg u m en ti s wi th o utm eri t . Ind et erm i n i n g wh et h er p as s ag e ei th er o f t i tl e o r o f t h e b en efi ts an db u rd en s h as o ccu rred , th e Co u rtl o o ks t o St at e l aw, i n th i s cas e, t o th e l aw o f Ok l ah o m a. See Un i t edSt at es v . Nat ’ l Ban ko f Co m m erce, 4 7 2 U.S. 7 1 3, 7 2 2 (1 9 8 5); Kei th v . Co m m i s s i o n er, 1 1 5 T.C. 6 0 5 , 6 1 1 (2 0 0 0). Iti s St at e l aw t h atcreat es an dg ov ern s th e n atu re o f i n t eres t s i np ro p ert y , wh i le Fed eral l aw co n tro l s t h e m an n er i n wh i ch s uch i n t eres t s are t ax ed . Kei th v . Co m m i s s i o n er, 1 1 5 T.C. at6 1 1. W i th res p ectt o real p ro pert y , a s al e o r t ran s fer o f
o wn ers hi p i s co m

p l et e up on th e earl i er o f t h e p as s ag e o f l eg al t i t l e o r t he p ract i cal
as s u m pt i o n o f t h e b en efi t s an db u rd en s o f o wn ers h ip . Id .; Bel d en v . Co m m i s s i o n er, T.C. M em o . 1 9 9 5 -3 6 0 , 1 9 95 W L 4 5 4 1 5 0, at* 3 -* 4 (ci t i n g Ok l ah o m a cas el aw). In th e p res en t cas e p et it i o n er t ran s ferred l eg al t i t l e as wel l as th e b en efi t s
an d b u rd en s o f o wn ers h ip . Pet i t i o n er co n v ey edthe p ro p ert i es t o Hack er Co rp . i n wri t in g b y

qu i t cl ai m d eed s o n M ay 2 , 2 0 0 5, an dth e d eed s were dul y fi l edi nth e Tu l s a Co u n ty

l an dreco rd s. See Ok l a. St at . t i t le 1 6 , s ecs . 4 , 1 5 (2 0 05 ). Un d er Ok l ah o m a l aw, a qu i t cl ai m d eedm ad e i ns ubs t an ti al co m p l i an ce wi th th e req u i rem en t s o f t i t l e 1 6 , ch ap t er 1 o f th e Ok l ah o m a St atu tes co n v ey s al l ri g h t , t i t l e,
an d i n teres to f t h e g ran t o r o f t h e l an d . Id . s ec. 1 8 ; s ee al s o i d . s ecs . 4 0 an d 4 1 (2 0 0 5); Beat t i e v . St at e ex rel . Gran dRi v er Dam Au th
. , 4 1 P.3 d 3 7 7 , 3 8 0 (Ok l a.- 2 9 -

[* 2 9 ] 2 0 0 2 ). Pet i t i o n er d o es n o tal leg e, an dthe ev i d en ce d o es n o ts h o w , that p et i t i o n er’ s qu it cl ai m

d eed s fai l edt o co m

pl y wi th t h e fo rm al req u i rem en ts o f Ok l ah o m a p ro p erty

l aw. Hack er Co rp . as su m edfro m p et i t i o n er t h e b en efi t s an d b u rd en s o f
o wn ers hi p . Fact o rs i n di cat i n g t h e b en efi t s an d b u rd en s o f o wn ers h i p i n cl ud e: (1 ) a ri g h tt o p o s s es s i o n ; (2 ) an o b l i g at i o nt o p ay t ax es , as s es s m en t s , an d ch arg es ag ai n s tth e p ro p ert y ; (3 ) a res p o n s i b i l i ty fo r i n s u ri n g t h e p ro p ert y ; (4 ) a du ty t o
m ai n t ai n th e p ro p erty ; (5 ) a ri gh tt o i m p ro v e t he p ro p ert y

wi th o u tth e s el l er’ s
co n sen t ; (6 ) a b eari n g o f t h e ri s ko f l o s s ; an d (7 ) a ri g h t t o o b t ai nl eg al t i t l e atan y t i m e b y p ay i n g th e b al an ce o f t h e fu l l p u rch as e p ri ce. Kei th v . Co m m i s si o n er, 1 1 5 T.C. at6 1 1 -6 1 2 . Wh en a b uy er, b y v i rtu e o f s u ch i n ci d en t s , wo u l d b e co n s i d ered t o h av e o b tai nedequ i t ab l e o wn ers h i p u n der St at e l aw, a s al e wi l l g en eral l y b e d eem edco m

p l et edfo r Fed eral t ax p u rp o ses . Id . at6 1 2
. Beg i n n in g i n M ay

2 0 0 5 Hack er Co rp ., an dn o tp et i t i o ner, carri edthe b en efi t s an db u rd en s o f o wn ers h i p . In ad d i t i o nt o h ol d i n g l eg al t i t le, Hack er Co rp . p ai dth e m o rt g ag es an dp ro pert y t ax p aym en ts as s o ci at edwi th th e p ro p ert i es an d cl ai m edd edu ct i on s o n i ts t ax retu rn s fo r d ep reci at i o n , m o rt g ag e i n t eres t , an dSt at e t ax es . Pet i t i on er m ai nt ai n edp o s s es s i o no f t h e p ro p ert i es , b u t b eg an m ak i ng ren t p aym en t s t o Hack er Co rp . Wh i l e i t i s tru e t h atn o wri t t en ren t al ag reem en t s were- 3 0 -

[* 3 0 ] en tered i n to an d p et it i o n er d i d , att i m es , m ak e p aym en t s d irect l y t o t h e
m o rt g ag e h o l d er, s u ch p aym en t s d o n o t o u twei g h the o th er fact o rs i n di cat i v e o f tran s fers
. M o reo v er, i ti s wel l es tab l i s h edth att ax p ay ers are o rd i n ari l y b o u n db y

th e fo rm o f t h ei r tran s act i o n s , wh i l e t h e g o vern m en t can at t ackth atfo rm i f i td o es n o t rep res en tth e s ub s t an ce o f t h e tran s act i o n . Newh al l Un it ru s tv . Co m m i ss i on er, 1 0 4 T.C. 2 3 6 , 2 4 3 (1 9 9 5 ), aff’ d , 1 0 5 F.3 d 4 8 2 (9 th Ci r. 1 9 9 7 ). Wh i l e t ax p ay ers are free t o o rg an i ze t h ei r affai rs as th ey ch o os e, o n ce t h ey

h av e d o n e s o, they

m u s t accep tth e t ax co n s equ en ces o f t h e ch o i ce, wh et h er co n tem pl at edo r n o t. Co m m i s s i o n er v . Nat ’ l Al fal fa Deh y drat i n g & M i ll i ng Co ., 4 1 7 U.S. 1 3 4 , 1 4 9 (1 9 7 4); CM I In t ’ l , In c. v . Co m m i s s i o n er, 1 1 3 T.C. 1 , 4 (1 9 9 9) (“ G en eral l y , t ax p ay ers are b o u n dt o the fo rm o f t h ei r t ran sact i o n .”). Th ere i s n o qu es t i o nth at p et i t i o n er i n t en d edt o tran s fer, an dHack er Co rp . i n ten d edt o recei v e, o wn ers h i p o f th e real p ro p ert i es . Th e p art i es ’ fai l u re t o ad h ere t o fo rm al i t i es s h o u l d n o t p ro v i d e
an o p p o rtu n i ty

t o rep u d iat e t he cl ear i n t en t i o n s o f t h e p art i es p o sth o c wh enfaced wi th ad v ers e t ax co n seq uen ces . See Hi l l v . Co m m i s s i o n er, T.C. M em o . 2 0 1 0 -2 6 8 , s l ip o p . at1 5
. Pet i t i o ner’ s referen ce t o th e Ok l ah o m a Un ifo rm Frau du l en tTran s fer Act i s al s o m i s p l aced . Th ats t atut e p ro v i d es cert ai nrem ed i es , i n cl u d i ng v o i d ab i li ty o f- 3 1 -

[* 3 1 ] th e t ran sfer, t o cred i t o rs o f t h e tran s fero r. See, e.g ., Ok l a. St at
. t i t l e 2 4 , s ecs . 1 1 9 an d1 2 0 (2 0 0 5 ). Th e p u rp o s e o f t h atActi s t o al l o w a cred i t o r t h e o p po rtu n i ty t o i nv al i d at e t h e t ran sfer o f as s et s m ad e b y a d eb t or i f th e t ran s fer h as th e effect o f p l aci ng as s et s o uto f t h e reach o f p res en t an dfu tu re cred i t ors . Bu rro ws v . Bu rro ws , 8 8 6 P.2 d 9 8 4, 9 88 (Ok l a. 1 9 94 ). Pet i t i o n er, as th e t ran s fero r, m ay n o t
av ai l i ts el f o f t he Act ’ s b en efi t s t o es cap e t he ad v ers e co n s equ en ces o f i ts d eci s i o n s . Pet it i o n er ch o s e t o s tru cture i ts affai rs i nth e m an n er i t d i d ; i th as n o t d em o n s trat edwh y

i ts h ou ldn o tb e h el d t o t h e fo rm o f t h e t ran sact i o n s th ati t d el i b erat el y

ch o se. See M es s i n a v . Co m m is si o n er, T.C. M em o . 2 0 1 7-2 1 3, at* 4 4 , aff’ d , 7 9 9 F. Ap p ’ x 4 6 6 (9 th Ci r. 2 0 19 ). Th e Co u rth o l ds thatp et i t i o n er fai ledt o rep o rtcap i t al g ai nwi th res p ectt o th e t ran s fers o f t h e p ro p ert i es at8 1s t W es tAv e.; 7 6 th St . No rt h ; Eas t6 1 s t St .; an d El m Pl
. Res p o n d en t ’ s d et erm i nat i o nwi th res p ectt o th o s e p ro pert i es i s s u s t ai n ed
. IV. Ren t al In co m e Gro s s i n co m e i n cl u d es ren t s . Sec. 6 1 (a)(5 ). Du ri n g 2 0 05 , 2 00 6 , an d2 0 0 7 p et i t i o n er recei v ed , b u td i dn o trep o rt , ren t p aym en t s fro m th e Kat y St . p ro p ert y . Rat h er, Hack er In v es t m en t rep o rt edrecei v i n g i n co m e fro m a n u m b er o f ren t al p ro p ert i es o n i t s retu rn s fo r t h os e y ears , i n cl u d i n g t h e Kat y St
. p ro p ert y , an dth e Hack ers rep o rt edth e ren t al i n co m e o nSch edu l e E at t ach edt o t h ei r t ax retu rn s .- 3 2 -

[* 3 2 ] Rel y i n g o n s pread s heet s m ai n t ai nedb y Hack er In v es t m en t, res p on d en t d et erm i n edth atp et i t i o n er’ s g ro s s ren t s fro m th e Kat y St . p ro p ert y

were $ 4 ,2 0 0 , $ 7 ,2 0 0 , an d$ 6,7 6 7 fo r 2 0 0 5 , 2 0 0 6 , an d2 0 0 7, res p ect iv el y . Aft er al l o w i ng d educt i o n s fo r d ep reci at i o n , res p o n d en t d et erm i n edthatp et i t i o n er recei vedn et i n co m e o f $ 2,9 9 7, $ 5 ,2 8 4 , an d$ 4 ,8 5 1 fo r 2 00 5 , 2 0 0 6, an d2 00 7 , res p ect i v el y . Pet i t io n er h as n oti n tro du cedan y ev i d en ce o r arg u m en t t o reb u tres p o n d en t ’ s d et erm i n at i o n . Res po n d en t ’ s d et erm i n at i on o f ren t al i n co m e fro m th e Kat y St
. p ro p erty i s s u s t ai n ed
. V. Di s al l o w edDedu ct io n s Sect io n 1 6 2 (a) al l o ws a d edu ct i o nfo r al l o rd i n ary an d n eces saryex p en s es p ai do r i n cu rred du ri n g th e t ax ab l e y ear i n carry i n g o nan y trad e o r b u s i n es s . Deduct io n s are a m at t er o f l eg i s l at i v e g race, an dp et i t i o n er h as th e b u rd eno f
es t ab l i s h in g en t i t l em en t t o an y cl ai m edd edu ct io n s . See INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ); Le v
. Co m m i s s i o n er, T.C. M em o . 2 0 2 0 -2 7 , at* 2 6; s ee al s o Ru le 1 4 2 (a). Sect i o n6 0 0 1 req u i res ev ery p ers o ns ub

ject t o i nco m e t ax t o m ai n t ai n b o o k s an dreco rd s s u ffi ci en tt o es tab l i s h th e am o u n to f g ro s s i n co m e an d d edu ct i o n s s h o wno ni t s i n co m e t ax retu rn . See al s o s ec. 1 .6 00 1 -1 (a), In co m e Tax Reg s .- 3 3 -

[* 3 3 ] A. Dep reci at i o n Ex p en s es Oni t s retu rn s, p et i t io n er cl ai m edd ep reci at i o nex p en s e d educt i o n s o f $ 2 4 7 ,7 3 0 fo r 2 0 0 4, $ 10 0 ,3 0 3 fo r 2 0 0 5 , $ 3 7,6 2 7 fo r 2 0 0 6, an d$ 59 ,5 0 1 fo r 2 0 0 7
. Res po n d en td i s al l o wedd ep reci at i o nwi th res p ectt o cert ai nas set s as fo l lo ws :

As s et 2 0 0 4 2 0 0 5 2 00 6 2 0 0 7 Dep reci at i o n d i s al l o wed 2 0 0 0 Fo rdF3 5 0 $ 1 , 6 6 9 $1 ,7 7 5 $1 ,7 7 5 $ 1 ,7 7 5 2 0 0 1 Fo rdEx p l o rer 1 , 7 7 5 1 ,7 7 5 1 ,7 7 5 1 ,7 7 5 2 0 0 0 Lex u s 2 , 9 5 0 1 ,7 7 5 1 ,7 7 5 1 ,7 7 5 2 0 0 2 Ni ss an 4 , 9 0 0 1 ,6 7 2 8 3 7 1 ,7 7 5 2 0 0 3 Hu m

m er 1 2 , 2 2 1 4 ,0 7 3 2 ,0 4 0
--- 2 / 2 / 04 Au t o 8 , 6 3 5 2 ,8 7 8 9 5 9 4 8 1 3 / 1 5 / 0 4 Au t o (2 0 0 4 BM W ) 1 0 , 6 1 0 4 ,8 0 0 2 ,8 5 0 1 ,6 7 5 4 / 2 9 / 0 4 Au t o (2 0 0 4 Cad i l l ac Es cal ad e) 1 0 , 6 1 0 4 ,8 0 0 2 ,8 5 0 1 ,6 7 5 3 / 1 / 05 Au t o --- 3 ,1 6 0 4 ,7 0 0 2 ,8 5 0 Fo rdF1 5 0
--- --- 1 ,2 5 9 9 ,2 3 7 1 0 / 1 / 0 7 Bu s (2 0 0 3 In tru der 3 6 9 recreat i o nal v eh i cl e)

--- --- --- 2 8 ,3 9 7 Dep reci at i o n ad

ju s t ed El m Pl . (l an d) 3 ,0 0 4 --- --- --- To t al 5 6 , 3 7 4 26 ,7 0 8 20 ,8 2 0 5 1 ,4 1 5- 3 4 -

[* 3 4 ] Sect io n 1 6 7 (a) al l o ws as a d ep reci at io nd edu ct i o n a reas o n ab le al l o wan ce fo r t h e ex h au s t i on , wear an d t ear o f p ro p ert y u sedi na t rad e o r b u si nes s o r h el dfo r th e p ro du ct i o n o f i n co m e. To s ub s t an t i at e en t i t l em en tt o a d ep reci at i o nd edu ct i on , a t ax p ay er n o t o n l y m

u s ts h o w th atth e p ro p ert y was u sedi na b u s i n es s b utal s o
m u stes t ab l i s h th e p ro p ert y ’ s d ep reci ab l e b as i s b y s h owi n g t h e co s to f th e p ro p erty , i t s u s efu l l i fe o r reco veryp eri o d , an di ts p rev i o us l y al l owab l e d ep reci at i o n . See, e.g ., Cl u ckv . Co m m i s s i o n er, 1 0 5 T.C. 3 24 , 3 3 7 (1 9 95 ); W SK & So n s , In c. v . Co m

m i s si o ner, T.C. M em o . 2 01 5 -2 0 4, at* 11 -* 1 2
. A t ax p ay er m ay

al t ern at i v el y

el ectt o treat the co s to f cert ai np ro p ert y u s ed i n an act i v e trad e o r b u s in es s as a cu rren tex p en se i n t h e y ear t h atth e p ro pert y i s p l aced i n s erv i ce. Sec. 1 7 9 (a), (d ). If t h e p ro pert y i s u sedfo r b o th b u s i n es s an d
o th er p u rp o s es , th enth e p o rt i o n o f t h e co s t th ati s at tri b u tab l e t o t h e b u s in es s u s e i s el i g i b l e fo r ex p en s i n g u n d er s ect i o n1 7 9 o n l y i f m o re t h an 5 0% o f t h e u s e i s fo r b u s i n es s p u rp o s es . See s ec. 1 .1 7 9 -1 (d ), In co m e Tax Reg s. W i th res p ect t o cert ai n i tem s , i n cl u di n g p as s en g er au t om o b i l es an dan y
o th er p ro p ert y

u s edas a m ean s o f t ran s p o rt at i o n , s ect i o n2 74 (d ) es t ab l i s hes h ei g h t en eds ub s t an t i at io n req u irem en t s thatm us tb e m ett o es t ab l i s h b u s in es s u s e. See al s o s ec. 2 8 0 F(d )(4 ). Inth e cas e o f s u ch p ro p ert y th e t ax p ay er m u s t
s ub s t an t i at e b y

ad equ at e reco rd s o r s u ffi ci en t ev i d en ce co rro b o rat in g th e- 3 5 -

[* 3 5 ] t ax p ay er’ s o wns t at em en tth e am o u n t , t i m e, p l ace an db u s i nes s p u rp o s e o f th e ex p en s e. Sec. 2 7 4 (d ). No d edu ct i o n i s al l o w edfo r p ers on al , l i v i n g , o r fam i l y
ex p en s es . Sec. 2 6 2 (a). Res p o n d en tco n t en d s th atp et i t i o n er h as fai ledt o s h ow i t s en t i t l em en tt o th e d ep reci at i o n o n th e v eh i cl es ab o v e (cl ai m edv eh i cl e d ep reci at i on ) b ecau s e p et i t i o n er h as n o tes t ab l i s hedeach v eh i cl e’ s b as i s , u s efu l l i fe, o wn ers h i p , o r b u s i n es s p u rp o s e. Pet it i o n er co n ced es o nb ri ef t h ati ti s n oten t i t l edt o th e cl ai m ed d ep reci at i o n d edu ct i o n s fo r t h e “ 2 / 2 / 0 4 Au t o ” o r fo r t h e l an d
. W i th res pect t o th e
rem ai n i n g cl ai m edv eh i cl e d ep reci at i o n , p et i t i o ner d i s ag rees wi th res p o nd en t ’ s ad ju s t m en t s b u to ffers l i t t l e i n t h e way o f arg u m en tt o es t ab l is h i t s en t i t l em en t th eret o . Pet i t i o ner h as fai l edt o d em o n s trat e i t s en t i t l em en tt o th e cl ai m edv eh i cl e d ep reci at i o n . Pet it i o n er d idn o tm ai n t ai n m i l eag e l o g s o r an y o th er reco rd s i n
co n nect io n wi th i t s u s e o f t he v eh i cl es rep o rt ed o ni t s d ep reci at i o ns ch edul es . In d eed , m an y

o f t h e v eh i cl es , i n cl u d i n g th e 2 0 0 0 Lex u s , th e 2 0 0 3 Hu m m er, t h e 2 0 0 4 BM W , an dth e 2 0 0 4 Cad il l ac Es cal ad e, were t h e p ers o n al v eh i cl es o f t h e Hack ers o r t h ei r ch il dren . No d o cu m en t at i o no r co rro b o rat i n g ev i d en ce was
s ub m i t t edi n s up p o rto f t h e Hack ers ’ cl ai m s th atth e v eh icl es were u s ed1 0 0 % fo r b u s i n es s u s e, an d th e Hack ers th em s el ves ackn o wl ed g edth atth ey an dth ei r- 3 6 -

[* 3 6 ] ch il dren u sed th em fo r co m m u t i n g an do th er p ers o n al act iv i t i es . W i th
res p ectt o t h e rem ai n i n g v eh i cl es , p et i t i o n er h as o fferedn o ev i den ce t o s up p o rti t s
en t i t l em en tt o th e cl ai m edd ep reci at io n . Res p o n d en t ’ s d i s al l o w an ce o f t he d ep reci at i o n ex p en s e d educt i o n s i s s u s t ai n ed
. B. Di s al l o w edBu s i n es s Ex pen s e Dedu ct io n s Res p o n d en td et erm i n edth at p et i t i o n er was n o ten ti t ledt o v ari o u s cl ai m ed b u s i n es s ex p en s e d edu ct i on s t o t al i n g $ 2 7 8 , 5 5 6 , $ 3 6 0 ,4 0 5 , $ 4 8 ,3 2 4, an d$ 21 ,8 3 0 fo r 2 0 0 4 , 2 0 05 , 2 0 0 6 , an d2 0 07 , res p ect i v el y , b ecau s e t h e rep o rt edex p en ses were
n o tes t ab l i s h edas b u si n es s ex p en s es o r were p ers o n al . Res p o n d en td i s al l o wed rep o rt edex p en s es fo r fo o d , act i v i t i es , s upp l ies , o ffi ce, au t o m o bi l e, t rav el , an d
m eal s an den t ert ai n m en t . Su ch ex p en d i tu res , res po n d en td et erm i n ed , were n o t b u s i n es s ex p en s es an d s ho u l db e recl as s i fi ed as co n s tru ct i v e d i vi d en ds t o th e Hack ers . As d i s cu s s edab ov e, s ect i o n1 6 2 (a) al l o ws a d edu ct i o nfo r al l o rd i n ary an d
n eces s ary ex p en ses p ai do r i n cu rreddu ri n g the t ax ab l e y ear i ncarry i n g o nan y trad e o r b u si n es s . Ano rd i naryan dn eces s ary ex p en s e i s o n e wh i ch i s ap p ro p ri at e
an d h el p fu l t o th e t ax p ay er’ s b u s i n es s an dres u l t s fro m an act i v i ty

th ati s a
co m m o n an daccep t ed p ract i ce i n th e b us i n es s . Am dah l Co rp . v . Co m m i s si o n er, 1 0 8 T.C. 5 0 7 , 5 2 3 (1 9 9 7 ); Kri s tv . Co m m is s i o n er, T.C. M em o . 2 0 0 1-1 4 0 , s l i p o p .- 3 7 -

[* 3 7 ] at6 . Wh et h er a p aym en tqu al i fi es fo r a d edu ct i o nu n der s ect i o n1 6 2 (a) i s a fact ual i s s u e wh i ch m

u s tb e d eci d edo n th e b as i s o f al l rel ev an tfact s an d ci rcu m s t an ces . Co m

m i s s i o ner v . Hei n i n g er, 3 2 0 U.S. 4 6 7 , 4 7 5 (1 9 4 3 ). Pet i t i o n er b ears th e b urd en o f p ro vi ng i t s en t i t l em en tt o the d i s al l o wedex p en s e d educt i o n s. See Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. at1 1 5 . Sect i on 2 7 4 (d ) d i s al l o ws
an y d educt i o n fo r an y

trav el i n g ex p en s e o r fo r l i s t edp ro p ert y , i n cl u di n g
au t o m ob i l e ex p en s es , u n l es s th e t ax pay er s ub s t an t i at es b y ad equat e reco rd s o r
s u ffi ci en tev i d en ce co rro b o rat i n g th e t ax p ay er’ s o wns t at em en t th e am o u n t, t i m e, p l ace, an db u s in es s p u rp o s e o f t h e ex p en s e. No d edu ct i o n i s al l o w edfo r p ers o n al , l i vi n g, o r fam i l y

ex p en s es . Sec. 2 6 2 (a). Pet i t i o ner arg u es th atres p o n den tarb i trari l y d i s al l o w edd edu ct i o n s fo r al l
ex p en d i tu res m ad e b y

cred itcard , o th er t han p aym en t s t o wh o l es al e fo o d d i s tri b u t o rs U.S. Fo o dServ i ce, Sy sco , an dFad l er, fo r each y ear. Pet i t i o n er
ex p lai n s atg reat l en g th o n b ri ef wh y th e g en eral l ed ger an ds p read sh eet s rel i ed
up o n b y i t s retu rnp rep arers were i n co rrect , m i scat eg o ri zedp u rch as es , d i dn o t
m at ch p erfect ly

wi th p et i t i on er’ s cred i t cards t at em en t s , o r were o therwi s e wro n g . Pet i t io n er arg u es th at“ th e o n l y ex p l an at i o n p ro v i dedb y [r] es p o n d en t ” i s th at
ex p en d i tu res “ h av e n o tb een v eri fi edas b u si n es s ex p en s e” an ds p en ds- 3 8 -

[* 3 8 ] co ns i d erab l e p o rt i o n s o f i t s b ri ef l i s ti n g th e ch arg es o ni t s cred i tcard s du ri n g th e y ears ati s s u e. Pet i t i o ner m i s u n d ers tan d s the b u rd en o f p ro o f i n thi s cas e. Det erm i nat i o n s
s etfo rt h i n th e n o t i ce o f d efi ci en cy are p res um edco rrect
. A t ax p ay er i s req u i red t o m ai n t ai n b o ok s an dreco rd s ad equat e t o es t ab li s h en ti t l em en tt o d edu ct i on s cl ai m ed . Sec. 6 0 01 ; s ec. 1 .6 0 0 1 -1 (a), In co m e Tax Reg s. Iti s p et i t i o n er’ s b u rd en t o d em o n s trat e i t s en t i t l em en tt o th e d edu ct i o n s cl ai m edo nth e retu rn s, i n cl u d i n g th ateach ex p en s e was p ai dan dth ati twas an o rd i n ary an dn eces s ary

b u s i n es s
ex p en s e. In l arg e p art , p et i t i o n er h as fai l edt o d o s o . Th ere i s n o d is pu t e t h atth e Hack ers an dth ei r ch i l dren i n cu rredth e ch arg es o n t h e cred i t cards t at em en t s , o r th atp et i t i o n er p ai dtho s e ch arg es an dcl ai m edd edu ct i o ns fo r t h e p u rch as es o n i t s retu rn s . Wh atp et it i o n er fai l s t o p ro v i d e, h o wev er, i s s ub s t an t i at i o no f wh atth e ch arg es rep res en t edo r t hei r b us i n es s p u rp o s e. M o reo v er, res p o n d en t ’ s d et erm i n at io n s were n o t arb i trary . Rat h er, t h e
reco rds h o ws , an dp et i t io ner h as ackn o wl ed g ed , thatth e Hack ers an dth ei r ch i l dren ro u t i n el y

ch arg ed pers o n al ex p en s es t o th ei r cred i tcard s, wh i ch were t h en p ai db y p et i t i o n er, an dei th er p o s t edo np et i t i o n er’ s g en eral l ed g ers o r cl ai m edas d educt i o n s o n i t s return s. Am o n g th o s e ex p en ses were t h e Hack ers ’ p ers o n al
v eh icl es , m eal s , co l l eg e tu i t i on , jewel ry , v acat i o n s , h o li d ay d eco rat i on s fo r t h e- 3 9 -

[* 3 9 ] Hack ers ’ p ers o nal res i d en ce, an dev en th ei r s on ’ s wed d i n g . Pet i t i o n er d educt edcred i tcardch arg es m ad e b y the Hack er ch i ldren ev en du ri n g p eri o d s wh en th ey were n otp ai dem p l oy ees . Su ch ex p en s es are i n h eren t ly p ers o n al an d
n o n d edu ct i b l e. See s ec. 2 6 2 (a). Fu rt her, t h e Hack ers d i dn o tad equ at el y s ub s t an t i at e an y o f p et it i o n er’ s rep o rt edex p en s es . Th ey d i dn otn o tat e t h e cred i tcards t at em en t s t o i n di cat e wh i ch ch arg es were b u s i n es s ex p en s es an d wh i ch were p ers o n al o r p ro v i de recei p t s o r an y ad d it i o n al i n fo rm at i o nreg ard i n g th e p u rch as es . In th e cas e o f t h e rep o rt edau t om o b i l e an dtrav el ex p en s es , th ey d i d n o t p ro v id e an y o f t h e req u i red i n fo rm at i o n t o m eetth e h ei gh t en eds ub s t an t i at i o nreq u i rem en t s o f s ect i o n2 7 4 (d ). In th e ab s en ce o f s u ch ev id en ce t h e Co urtcan no tas s es s wh et h er an d t o wh at
ex t en tth e p u rch as es were o rd i n ary an dn eces s ary

b u s i n es s ex p en s es . Nev ert h el es s , th e Co u rti s p ers u ad edth atp et i t i o n er d i d p ay ex p en s es
as s o ci at ed wi th th e ru n n in g o f i t s s i x d ay care cen t ers du ri n g the y ears ati s s u e ab o ve t h e am o un t s res po n d en t al l o wed . Wh en a t ax p ay er es t ab l i sh es th at i th as p ai dd edu ct i b l e ex p en s es b u ti s u n ab l e t o s ub s t an t i at e th e ex actam o u n t s , th e Co u rt
m ay es t i m at e th e d edu ct ib l e am o u n t , b eari n g h eav i l y up o nth e t ax p ay er wh o s e i n ex act i tu d e i s o f i t s o wnm ak i n g . See Co h an v . Co m m i s s i o n er, 3 9 F.2 d5 4 0 , 5 4 3 -5 4 4 (2 dCi r. 1 9 3 0 ).- 4 0 -

[* 4 0 ] M rs . Hack er t es t i fi edth atth e d ay care cen t ers p ro vi dedi t s s tu d en ts wi th two
o r t h ree m eal s each d ay , as wel l as an aft ern o o n s nack . M u ch o f t h e fo o dwas p ro v id edb y

wh o l es al ers o r o th er s up p l i ers , s uch as Sy s co , U.S. Fo odServ i ce, o r Fad ler, an dres p on d en tal l o wedd edu ct i o n s fo r t h o s e p u rch as es . A d i rect o r ato n e
o f p et i ti o n er’ s d ay care cen t ers t es t i fi edth ati twas n o t u n co m m on fo r a d ay care
cen t er t o ru n l o wo r req u i re ad di t i o n al fo o d , h o wev er, an dem p l o y ees were freq uen t l y

req u i red t o m ak e t ri p s t o t h e g ro cerys t o re t o p i ckup ad d i t i o nal i t em s . Th e Co u rtfo u n dth e em

pl o y ees ’ t es t i m o n y

cred i b l e an dwi l l al l ow p et i t i o ner t h e ad d it i o n al cl ai m edd edu ct i o n s fro m g ro cerys t o res t o tal i n g $ 8 4,9 0 5 fo r 2 0 0 4 an d $ 7 4 ,0 1 0 fo r 2 0 0 5
. Si m i l arl y , th e Co urti s p ers u ad edth atp et i t i o n er p ai dact i v i ty ex p en s es du ri n g th e y ears ati s su e. On b ri ef, p et i t i o n er i d en t i fi es a l i s to f cred i tcardch arg es t o t al i n g $ 1 1 ,7 0 0 .7 4 fo r 2 0 0 4 an d$ 9 ,6 6 1 .4 7 fo r 2 0 0 5 th at , p et it io n er al l eg es , rep res en tact i v i ty

ex pen s es fo r t h o s e y ears . Up o nco n s i d erat i on , th e Co u rtwi l l al l o w ad di t i on al act i v i ty

ex pen s es o f $ 1 0 ,5 4 7 .5 9 fo r 2 0 0 4 an d $ 9 ,6 6 1 .4 7 fo r 2 0 0 5
. Th o se am o u n t s refl ectt o t al p u rch as es fro m b u s i nes s es s peci al i zi ng i nearl y edu cat i o n o r ch i ld care-rel at edequ i p m en t , act i v i t i es , o r m at eri al s , wh il e d i s al lo wi n g p u rch as es fro m s t o res s u ch as K-M art an dW al -M art , wh i ch m ay
co n tai n s o m e p ers o n al el em en t . Iti s cl ear t h atth e am o u n t s al l o wed were n o t- 4 1 -

[* 4 1 ] p ers o n al b u trep res en t o rd i n ary an dn eces saryex p en s es rel at edt o o p erat i n g a d ay care cen t er. Acco rd i ng l y , th e Co u rtfi n d s t h atp et i t i o n er i s en t i t l ed t o ad d i t i o nal b u s i n es s
ex p en s e d educt i o ns t o t al i n g $ 9 5 ,4 5 2 .5 9 fo r 2 0 04 an d $ 8 3 ,6 7 1 .4 7 fo r 2 0 0 5 . Th e
rem ai n d er o f res p on d en t’ s d et erm i n at i o n i s s u s t ai n ed
. C. M an ag em en tFees Pet i t i o ner cl ai m edd edu ct i o ns fo r m an ag em en tfees i nco n n ect i on wi th i t s p aym en t s t o Hack er Co rp . fo r s erv i ces th e Hack ers an d t h ei r ch i ldren ren d ered
an d , b eg i n ni n g i n M ay

2 0 0 5, fo r t h e u s e o f t h e p ro pert i es . Oni t s retu rn s p et i t i o n er cl ai m edd edu ct i on s o f $ 3 09 ,3 00 , $ 3 4 2 , 6 5 0 , an d $ 3 7 8 ,4 84 fo r 2 0 0 4 , 2 00 5 , an d 2 0 0 6 , res p ect i v el y . Res p o n d en trev i ewedp et i t i o n er’ s g en eral l ed g er an db an k
acco u n t s an dd et erm in edth atp et i t i o n ers p ai dm an ag em en tfees o f $ 1 2 1 , 8 00 , $ 2 5 8 ,4 0 0 , an d$ 31 0 ,7 0 0 fo r 2 0 0 4 , 2 0 0 5 , an d2 0 0 6 , res p ect i v el y , o nth e b as i s o f ch eck s fro m

p et i t io n er t o Hack er Co rp . b u t d is al l o wed th e rem ai n i n g am o u n t s o n th e b as i s th at n o s ubs t an t i at i o n o r ex p l an at i o n was p ro v i d edreg ard i n g th o s e
am ou n t s . Pet i t i o ner o b

ject s t o res po n d en t’ s ad

ju st m en t s , arg ui n g , es s en t i al l y , th at
res p o n d en t fai l ed t o i n cl u d e cert ai nm an ag em en t fee p aym en t s t o Hack er Co rp . Pet i t io n er cred i b l y

m ai n tai n s th atth e m an ag em en t fees p ai dt o Hack er Co rp . were- 4 2 -

[* 4 2 ] Hack er Co rp .’ s o n l y s o u rce o f i n co m e du ri n g th e y ears ati s s u e an dth atal l
o f t h e fees p et i t i o n er d edu ct edo n i t s retu rn s were rep o rt edas g ro s s recei p ts b y Hack er Co rp . Yetwh i l e res p o n d en tal l o wedd edu ct i o n s o f $ 1 2 1,8 0 0 , $ 2 5 8 ,4 0 0 , an d $ 3 1 0 ,7 0 0 fo r 2 0 0 4 , 2 00 5 , an d2 0 0 6 , res pect i v el y , res p o n den tal s o ad j u s t edthe g ro s s recei p ts o f Hack er Co rp . t o $ 1 2 5 ,8 50 , $ 3 0 4 , 4 63 , an d $ 3 7 0 , 6 26 fo r t h e s am e y ears , res p ect i v el y . Pet i t i o ner’ s p o s i t i o n i s s up p o rt edb y th e ev i d en ce. A rev i ew o f p et it i o n er’ s b an k s tat em en t s , as wel l as res po n d en t ’ s an al y s i s o f Hack er Co rp .’ s b an kd ep o s it s , rev eal s thatres p o n den tfai l edt o t ak e i n t o acco u n t ch eck s fro m p et i t io n er t o t al i n g $ 4 ,0 5 0 , $ 1 2 , 4 0 0 , an d$ 1 , 1 0 0 fo r 2 0 0 4, 2 0 0 5 , an d2 0 0 6, res p ect iv el y . Inad d i t i o n
res p o n d en t d i dn o t co n s i d er Hack er Co rp . cas h d ep os i t s t o t al i n g $ 1 1,8 5 0 i n2 0 0 5
an d $ 2 ,6 0 0 i n 2 00 6 . M r. Hack er t es t i fi edth atp et i t i o ner was th e o n l y s o u rce o f i n co m e fo r Hack er Co rp . Th e Co u rtfi n ds M r. Hack er’ s t es t i m o n y cred i b l e o nth at p o i n tan dfi n d s th atth e cas h p aym en t s t o Hack er Co rp . were fro m p et i t i o n er. Fi n al l y , res p o n d en tackn o wl ed g es th atp et i t i o ner m ad e o n e p aym en t o f $ 21 ,8 1 3 i n 2 0 0 5 an dtwo paym en t s o f $ 2 1,8 1 3 i n2 0 0 6 d irect l y t o Secu ri ty Ban kt o wardth e
m o rt g ag es o n th e p ro p ert ies i tren t edfro m Hack er Co rp ., i n l i euo f p aym en t s t o Hack er Co rp .- 4 3 -

[* 4 3 ] Acco rd i ng l y , p et i ti o n er h as es t ab li s h edth at i ti s en t i t l ed t o ad d i t i o nal d educt i o n s fo r m an ag em en t fees o f $ 4 ,0 5 0 , $ 4 6 ,0 6 3 , an d$ 4 7 ,3 2 6 fo r 2 0 0 4 , 2 0 0 5 , an d 2 0 0 6 , res p ect iv el y , i n ex ces s o f t h o se res p o n d en tal l o wed . Th e rem ai n i n g p o rt i on s o f res p on d en t’ s ad ju s tm en t s are s us t ai n ed
. D. In t eres t Pet i t i o ner d educt edi n t eres tex p en s es o f $ 1 0 9 ,4 1 5 , $ 1 8 ,6 0 7 , $ 3 0 , 7 78 , an d $ 1 7 ,3 5 9 fo r 2 0 0 4 , 2 0 05 , 2 0 0 6 , an d2 00 7 , res p ect i v el y . Res p on d en td i s al l o wed $ 1 2 ,9 1 7 o f t h e cl ai m edi n teres tex p en se d edu ct i on s fo r 2 0 0 4 , $ 17 ,9 6 3 fo r 2 0 0 6 , an d $ 1 7 ,3 5 9 fo r 2 0 0 7 . Res po n d en td et erm i n edan i n creas e i n i n t eres t p ai dfo r 2 0 0 5 o f $ 4 3 ,2 45 b ecau s e, al th o u g h res p o n d en td et erm i nedth at p et it i on er was n o t
en t i t l edt o cert ai n cl ai m edi n teres tex p en s e d edu ct i o n s fo r t h aty ear, p et i t i o n er was
en t i t l edt o o n e-h al f o f t h e i n t eres tp ai do nthe n o t es o nth e real p ro p ert i es du ri n g 2 0 0 5 . Pet i t i o n er d o es n oto ffer an y arg um en to r i d en t i fy

an y ev i d en ce t h at
res p o n d en t’ s ad

ju s t m en t s are i n co rrect . Acco rd i n g ly , th e Co u rts u s t ai n s
res p o n d en t’ s d i s al l o wan ce o f the cl ai m edi n teres tex p en s e d edu ct i o n s . E. Rep ai rs Oni t s retu rn s p et i t i o ner d edu ct edrep ai r an dm ai nt en an ce ex pen s es o f $ 4 1 ,8 5 9 , $ 1 09 ,7 93 , $ 1 2 0 , 1 1 7 , an d$ 1 7 1 ,8 0 8 fo r 2 0 0 4 , 2 00 5 , 2 0 0 6 , an d 2 0 0 7 , res p eci t vel y . Of th o se am o u n ts res p o n d en t d i s al lo wed $ 1,6 7 4 , $ 3 8 ,7 7 5 , $ 2 3 ,9 4 6 ,- 4 4 -

[* 4 4 ] an d $ 2 7,7 0 0 fo r 2 0 0 4 , 2 00 5 , 2 0 0 6 , an d 2 0 0 7 , res p ect i v el y . Fo r 2 0 0 4
res p o n d en t d et erm i nedth at$ 1 , 6 7 3 .7 7 was a p ers o nal ex p en s e p ai d fo r wo rko n the Hack ers ’ b o at . Fo r 2 0 05 res p o n d en td i s al l o wedrep ai r ex p en s e d edu ct i o n s t o t al i n g $ 3 8 ,7 7 5 , o n th e g ro u n d s that$ 9 ,5 3 5 .7 4 was p ai dt o M et ro Co ns tru ct i o n, In c. (M et ro ), i n co n n ect i o n wi th wo rko np ro p ert y p et i t i o n er d i dn o to wn ; i n v o i ces
co u ldn o tb e p ro v i d edwi th res p ectt o a p aym en to f $ 9,7 0 0 t o M et ro ; an d$ 1 9 ,5 3 9 i n rep o rt edex p en s es co ul dn otb e s ub s t an t i at ed . Si m i l arl y , fo r 2 0 0 6 res p o n d en t d i s al lo weda d educt i o n fo r a p aym en tt o M et ro o f $ 1 0 ,8 7 5 .1 2 b ecau s e n o i n v o i ce
co u ldb e p ro v i d ed ; an d$ 1 0 ,8 7 5 i nrep o rt edex p en s es co ul d n o tb e s ub s t an t i at ed
. 8 Res po n d en td i s al l o wed$ 2 7 ,7 0 0 o f rep ai r ex p en s e d edu ct io ns fo r 2 0 0 7 b ecau s e o f l acko f s ub s t an t iat i o n . In s up p o rto f i t s en ti t l em en t t o th e cl ai m edd edu ct i o n s , p et i t i o n er d i rect s th e Co u rto n l y

t o en tri es o n i t s g en eral l ed ger o r t o cred i t cards t at em en t s refl ect i n g th e am o un t s ch arg ed
. Su ch en tri es d o n o tes t ab l i s h the n atu re o f t h e p u rch as es o r th e b u si n es s p u rp o se o f t h e i t em s p u rch as ed . W i th th e ex cep t io n s o f t h e M et ro i n v o i ces , s ev eral o f wh i ch p ert ai n edt o p ro p ert y o wn edb y

p et i t i o n er’ s
s h areh o ld ers o r rel at eden t i t i es , an do f t h o s e am o un t s res p o n d en tco n ced ed ,

8 Res p o n d en th as co n ced edth at p et i t i o n er h as s ub s t an t i at ed$ 5,2 9 1 i n ad d it i o n al ex p en s es fo r 2 0 0 6
.- 4 5 -

[* 4 5 ] p et i t i o n er h as n o t i n tro du cedco rro b o rat i n g ev i d en ce t o s up p o rti t s cl ai m th at th e d i s al l o wed rep ai r ex pen s e d edu ct i o ns were fo r i t s o rd i naryan d n eces s ary
ex p en s es . Pet i t i o n er h as n o tm eti t s b urd en o f p ro o f. Res p o nd en t ’ s d et erm i n at i o n s are s u s t ai n ed
. F. Sup p l i es Oni t s 2 0 0 7 ret u rn p et it i o n er cl ai m eda d edu ct io n fo r s up p l i es o f $ 6 2 2 ,7 1 4
. Th atam o u nti ncl u d edap p ro xi m at el y 8 0 % o f al l p aym en t s p et i t io n er m ad e t o i t s cred i tcardi s s u ers i n 2 00 7 , wh i ch M s . Ki n g reco rd edas s upp l i es ex p en s es wh en p rep ari n g p et i ti o n er’ s g en eral l ed g er an dfi n an ci al s tat em en t s th ats erv edas th e b as i s fo r p et i ti o n er’ s 2 0 07 t ax retu rn . Res p o n d en td i s al l o w ed$ 4 3 6 ,4 0 8 o f th e cl ai m edd edu ct i on . Of th atam o u ntres p o n den td i sal l owed$ 2 7 1 ,8 6 7 o f t he $ 2 9 1 ,1 0 0 p ai d t o p et i t io ner’ s cred i tcardi s s u ers , wh ich res p o n d en td et erm i n ed was fo r p ers o n al ex p en s es . Th e d i sal l o wedam o u n tal s o i n cl u d edch eck s t o t al i n g $ 1 5 3 ,0 0 0 wri t t en t o p et i t i o n er, a tran s fer o f $ 6 ,5 41 .2 4 , a $ 50 0 ch eckt o Lo la Sh o ck l ey , a $ 2 ,5 0 0 ch eckt o St ev en Hack er, an da $ 2 ,5 0 0 ch eckt o M rs . Hack er, al l o f wh i ch were cl ai m edas s up p l i es ex p en s e d edu ct i o n s o np et i t i o n er’ s 2 0 0 7 retu rn . As wi th th e d i s al l owedb u s i nes s ex p en s e d educt i on s fo r 2 0 0 4 th ro u gh 2 0 0 7 , p et i t i o n er p ri m ari l y arg u es th atres p o n d en t ’ s d i s al l o wan ce o f th e cl ai m ed- 4 6 -

[* 4 6 ] d edu ct i o ns was arb i traryan dwi tho u t a fact u al b as i s b u tfai l s t o p res en t
ev i d en ce o r arg u m en t reg ard i n g th e b u si n es s p u rp o se o f t h e m ajo ri ty o f i t s
ex p en d i tu res o r o ffer m

u ch i n th e way

o f d i fferen t i at i n g b et ween b us i n es s an d p ers o n al p u rch as es . Pet i t i o n er d o es p ro v i d e a l is t o f p u rch as es th at i tal l eg es were fo r fo odp u rch as es fo r t h e s tu d en t s . As wi th th e cl ai m edfo o dex p en s e d edu ct i on s fo r 2 0 0 4 an d 2 0 0 5, the Co u rt fo u n dth e wi tn es s es ’ t es t i m o n y cred ib l e o n th i s p o i n t
an d wi l l al lo w an ad di ti o n al d edu ct i o nfo r p et i t i o n er’ s g ro cerys t o re p u rch as es , t o t al i n g $ 2 3 ,0 2 3 .5 7 fo r 2 0 0 7
. W i th res p ectt o th e rem ai n i n g ex p en ses , res p o n d en t’ s d et erm i n at i o n s are s u s t ai n ed
. VI. In d i an Em

pl oym en tCred i t Pet i t i o ner cl ai m edIn d i an em p l o ym en tt ax cred i t s o f $ 2 6 ,4 0 0 , $ 2 4,2 5 9 , $ 3 9 ,2 8 3 , an d$ 3 1,7 5 2 fo r 2 0 0 4 , 2 0 0 5 , 2 0 0 6 , an d2 0 0 7 , res pect i v el y . Sect io n 3 8 al l o ws a t ax pay er t o cl ai m ag ai n s t h i s t ax a g en eral b us i n es s cred i t , equ al t o th e s u m

o f t h e cu rren t -y ear b u s i n es s cred i t, an db u s i nes s cred i t carry fo rward s an dcarryb ack s carri edt o th e t ax ab l e y ear. Sec. 3 8 (a). Th e am o u n t
o f t h e cu rren ty ear b u s i n es s cred i ti n cl u des , am o n g o th er i t em s, the In di an
em pl o y m en tcred i tas d et erm i n edu n d er s ect i o n 4 5 A(a). Sec. 3 8 (b )(1 0 ). Sect i o n 4 5 A(a) p ro v id es th atth e am o u n to f t h e In d i an em p l o y m en t cred i twi th res p ectt o- 4 7 -

[* 4 7 ] an y em p l o y er fo r an y

t ax ab le y ear i s an am o u n t equ al t o 2 0 p ercen t o f t h e
ex ces s (i f an y ) o f-- (1 ) t h e s u m o f-- (A) t h e qu al i fi edwag es p ai do r i n cu rreddu ri n g s u ch t ax ab l e y ear, p l u s (B) q u al i fi edem

p lo y ee h eal th i n s u ran ce co s t s p ai do r i n cu rreddu ri n g
s u ch t ax ab l e y ear, o v er (2 ) t h e s u m o f t h e qu al ifi edwag es an d qu al i fi edem p l o y ee h eal th i n s u ran ce
co s t s (d et erm i n edas i f t hi s s ect i o nwere i neffect ) wh i ch were p ai d o r i n cu rred b y th e em p lo y er (o r an y p red eces s o r) du ri n g cal en d ar y ear 1 9 93
. Sect io n 4 5 A(b )(1 ) d efi n es “ qu al i fi edwag es ” as “ an y wag es p ai d o r i n cu rred b y an em p l o y er fo r s erv i ces p erfo rm edb y an em p l o y ee wh i l e s u ch em

p l o y ee i s a qu al i fi edem

p l o y ee.” A “ qu al i fi edem p l o y ee” i s d efi n edi n s ect i o n4 5 A(c)(1 ) as
an y em pl o y ee wh o i s an en ro l l edm em b er o f anIn d ian tri b e o r t h e s p o us e o f an
en ro l l edm em

b er, s ub s t an t ial ly

al l o f wh o s e s erv i ces fo r t h e em pl o y er du ri n g th e p eri o dare p erfo rm edwi th i n an In d i an res erv at i o n , an dwh o s e p ri n ci p al p l ace o f ab o de du ri n g t h e p eri o d wh i l e p erfo rm in g th e s erv i ces i s o no r n ear t h e res erv at i o n i n wh ich th e s erv i ces are p erfo rm ed . See al s o W arb el o w’ s Ai r Ven tu res , In c. v . Co m m i s s i o n er, 1 1 8 T.C. 5 7 9 , 5 8 2 (2 0 0 2), aff’ d, 8 0 F. Ap p ’ x 1 6 (9 th Ci r. 2 0 0 3 ).- 4 8 -

[* 4 8 ] Pet i t i o ner cl ai m edIn d i an em p l o ym en tt ax cred i t s o f $ 2 6 ,4 0 0 , $ 2 4,2 5 9 , $ 3 9 ,2 8 3 , an d$ 3 1,7 5 2 fo r 2 0 0 4 , 2 0 0 5 , 2 0 0 6 , an d2 0 0 7 , res pect i v el y , o nth e b as i s
o f cl ai m edqu al i fi edwag es o f $ 1 3 2 ,0 0 1, $ 1 21 ,2 9 3 , $ 1 9 6 ,4 1 7 , an d$ 1 5 8 ,7 5 8 , res p ect i vel y . Oneach return p et i t i o n er al s o rep o rt edth at th e s u m o f qu al i fi ed wag es an dqu al i fi ed em

p l o y ee h eal th i n s u ran ce co s ts p ai d duri n g 1 9 9 3 was zero . Res po n d en td et erm i n edth atp et i t i o n er p ai d qu al i fi edwag es o f $ 43 ,6 9 4 , $ 4 8 ,4 5 2 , $ 5 4 ,8 0 6 , an d$ 4 1,1 3 7 i n 2 0 0 4 , 2 0 0 5 , 2 0 0 6, an d2 00 7 , res p ect i v el y , b u td i s al l o wed th e cred i t s i n th ei r en t i ret y on th e b as i s th at p et it i on er fai l edt o s ub s t an t i at e t h ati ts qu al i fi edwag es p ai di n th e y ears ati ss u e ex ceed edth e qu al i fi edwag es p ai di n 1 9 9 3
. Pet i t i o ner b ears th e b u rd en o f es t ab l i s h i n g i t s el i g ib i l i ty fo r th e t ax cred i t s . See Ru l e 1 4 2 (a). Attri al p et i t i o n er i n tro du cedi nt o ev i den ce co p i es o f i t s Em p l o y ers Qu art erl y

Co n tri b u t i o nRep o rt s fi l edwi th th e Ok l ah o m a Em p l o ym en t Secu ri ty Co m m is s i o n fo r al l fo u r qu art ers o f 1 9 9 3. Th e rep o rt s s h o wt o t al wag es
o f $ 1 87 ,6 1 1 .2 9 p ai d i n 1 9 9 3 , as wel l as a l arg el y i l leg i bl e l i s to f p et i t i o n er’ s
em pl o y ees an dth ei r wag es p ai deach quart er. Attri al M r. Hack er t es ti fi edth at h e
reco g n izedo n e i n d i v i du al fro m th e 1 9 9 3 l i s tas an en ro l l edm em b er o f an In d i an tri b e. In ad d i t i o n, M rs . Hack er, wh o i s al so an en ro l l edm em b er o f an In di an tri b e,
was i d en ti fi edas anem

p l o y ee i n 1 9 9 3 , wh en s h e recei v edwag es t o tal i n g- 4 9 -

[* 4 9 ] $ 1 2 ,5 0 0. 9 No fu rt h er t es t i m o ny o r o th er ev i d en ce was o ffered o nwh et h er
an y o th er em p l o y ee was a qu al i fi edem p l o y ee i n 1 9 9 3 o r wh at th e qu al i fi edwag es
o f an y s u ch em p l oy ees were. In d eed , M r. Hack er ack n owl ed gedth at , g i v en th e i l leg i b i l i ty

o f m an y o f t h e d o cu m en t s , h e was u n ab l e t o d o s o . No r h as p et i t i on er s h own th ati tp ai dqual i fi edwag es i nex ces s o f t h e
am ou n t s res p o n d en tco n fi rm ed . Attri al p et i t i o n er i n tro ducedd ocu m en t at io n p u rp ort i n g t o d em o n s trat e t hatcert ai nem p l o y ees were q u al i fi edem p l o y ees . M u ch
o f t h at ev i d en ce was dupl icat i v e, rel at i n g t o em p l o y ees p rev i o u s l y

d et erm i nedb y
res p o n d en t t o b e qu al i fi edem p l o y ees . No n e o f t h e ev i d en ce d em o n st rat ed wh et h er an y

ad di ti o n al em

p l o y ees m etth e requ irem en ts s et fo rt h ats ect i o n 4 5 A(c)(1 ). Acco rd i ng l y , p et i ti o n er h as fai l edt o s h o w th ati t s qu al ifi edwag es p ai di n
an y o f t h e y ears ati s s u e ex ceed edth e qu al ifi edwag es p ai d i n1 9 9 3 . Res p o n d en t ’ s d et erm i n at i o n s are s u s t ai n ed
. VII. W ag e Ad

j u s t m en t Res p o n d en td et erm i n edth at p et i t i o n er i s en t i t l edt o wag e d edu ct io n s o f $ 1 9 8 ,7 4 0 fo r 2 0 0 4, $ 20 9 ,2 0 0 fo r 2 0 0 5 , $ 2 20 ,2 1 0 fo r 2 0 06 , an d$ 2 3 1 ,8 00 fo r 2 0 0 7 ,

9 M rs . Hack er can n o tb e a qu al i fi edem pl o y ee b ecau s e s h e i s a 5 1% o wn er o f p et i t i o n er. See s ec. 4 5 A(c)(5 )(B).- 5 0 -

[* 5 0 ] o n th e b as i s o f res po n d en t ’ s d et erm i n at i o n s o f wag es p ai d t o t h e Hack ers fo r
s erv i ces th ey

p ro v i d edt o p et it i o n er. Res p o n d en t ’ s wag e d et erm i n at i o n s fo r 2 0 0 5, 2 0 0 6 , an d2 0 0 7 were co n si d eredi nco n n ect i o n wi th the No t i ce o f Det erm i n at i o n
o f W o rk er Cl as s i fi cat i o n t h atwas th e s ub jecto f t h e cas e atd o ck etNo . 3 8 6 9 -1 2 , d eci d ed atBl o s s o m

Day Care Ct rs ., In c. v . Co m

m i s s i o n er, T.C. M em o . 2 0 2 1 -8 6
. In th at rep o rtthe Co u rts u s tai n edres po n d en t ’ s d et erm i n at i o n t h atM r. an dM rs . Hack er were em

p l o y ees o f p et i t i o ner an dth atrem u n erat i o n p ro v i dedd i rect l y o r i n d i rect l y t o th em co n st i tut edwag es . Th e Co u rt ’ s reas o n in g i nth at cas e i s equ al l y ap p li cab l e fo r 2 0 0 4
. M r. an dM rs . Hack er p ro v i d eds ub s t an ti al s erv i ces t o p et i t i o n er an d , i n ex ch an g e, recei v ed co m p en sat i on i nth e fo rm

o f m o ney , p ro p erty , an do ther d i rect an di n d i rect b en efi t s b u t fai l edt o p ay th em s el v es
reas on ab l e wag es . Pet i t io n er h as fai l ed t o s h o wthatth e wag es res po n d en t d et erm i n edare erro n eo u s . Th e wag e ad j u s t m en t s are s u s tai n ed
. VIII. Ad d it i on t o Tax an dPen al t i es A. Sect io n 6 6 5 1 (a) Ad d i t i o nt o Tax Sect io n 6 6 5 1 (a)(1 ) i m

p o s es an ad d i t io nt o t ax fo r fai lu re t o t i m el y fi l e a Fed eral i nco m e t ax return u n l es s i ti s s h o wnth atth e fai lu re i s du e t o reas o n ab l e
cau s e an d n o t du e t o wi l l fu l n eg l ect . Th e ad d i t i o nt o t ax i s equ al t o 5 % o f t h e
am ou n treq u i redt o b e s h o wnas t ax o n th e d el i n quen tretu rn fo r each m o n th o r- 5 1 -

[* 5 1 ] fract i o n th ereo f du ri n g wh i ch th e ret u rn rem ai n s d el i nqu en t , up t o a
m ax i m u m ad d it i o n o f 2 5 % fo r retu rn s m o re th an fo ur m o n th s d el i n qu en t
. Sec. 6 6 5 1 (a)(1 ). A t ax p ay er i s n o tl i ab l e fo r t h e ad d i ti o nt o t ax fo r fai lu re t o t i m el y fi le i f t h e u n t i m el i n es s was du e t o reas o n ab l e cau s e an dn o tdue t o wi l l fu l n eg l ect
. Sec. 6 6 51 (a)(1 ); Hi g b ee v . Co m m is s i o n er, 1 1 6 T.C. 4 38 , 4 47 (2 0 0 1 ). Th e b u rd en
o f p ro v i n g reas o n ab l e cau s e an dl acko f wi ll fu l n eg l ect fal l s o nth e t ax p ay er. 1 0 Ru l e 1 4 2 (a); Un i t ed St at es v . Bo y l e, 4 6 9 U.S. 2 4 1, 2 4 9 (1 9 8 5 ). Pet i t i o ner’ s 2 0 0 7 i n co m e t ax return was du e M arch 1 5 , 2 0 0 8 . See s ec. 6 0 7 2 (b ). Pet i t io n er fi l edth atretu rn o nOct o b er 2 7 , 2 0 08 , wh i ch i s m o re t h an fo u r
m o nt h s aft er t h e du e d at e. Pet i t i o n er d o es n otal l eg e, an dth e ev i d en ce d o es n o t
s h o w, thati t s u n t i m el y

fi l i n g was du e t o reas on ab le cau s e. Acco rd in gl y , p et i t i o n er i s l iab l e fo r t h e ad d it i o n t o t ax u n d er s ect io n6 65 1 (a)(1 ) fo r 2 0 0 7
. B. Pen al t ies 1
. Sect io n 6 6 6 3 (a) Frau dPen al t i es Res p o n d en td et erm i n edth at p et i t i o n er i s l i ab l e fo r s ect i o n 6 6 6 3 frau d p en al t i es fo r t h e y ears ati s s u e. A p en al ty equ al t o 7 5 % wi l l b e i m

p o sedo nan y

1 0 Sec. 7 4 91 (c), wh i ch s h i ft s the b u rd en o f p ro du ct i o n t o th e Secret ary i n an y co u rtp ro ceed i ng wi th res p ectt o l i ab i li ty fo r an y p en al ty , ad d i t io nt o t ax , o r ad d it i o n al am o u n t, ap p l i es o nl y t o i n d i v i dual s . See al s o NT, In c. v . Co m m i s s i o n er, 1 2 6 T.C. 1 9 1 , 1 9 5 (2 0 0 6).- 5 2 -

[* 5 2 ] p arto f t h e t ax pay er’ s u n d erp aym en to f Fed eral i n co m e t ax th at i s du e t o frau d. Sec. 6 6 6 3(a). Frau di s an i n t en ti o n al wro n gd o in g o nth e p arto f t h e t ax p ay er wi th th e s peci fi c p u rp o s e o f ev ad in g a t ax b el i ev edt o b e o wi ng . Ed el s o n
v . Co m m i s s i o n er, 8 2 9 F.2 d8 2 8 , 8 3 3 (9 th Ci r. 1 9 8 7 ), aff’ g T.C. M em o . 1 98 6 -2 2 3 ; Di Leo v . Co m

m i s s i o n er, 9 6 T.C. at8 7 4 ; M i n ch em In t ’ l , In c. v . Co m

m i s si on er, T.C. M em o . 2 01 5 -5 6 , at* 4 3 , aff’ ds ub n o m . Su nv . Co m m i s s i o n er, 8 8 0 F.3 d1 7 3 (5 th Ci r. 2 0 1 8 ). If an y

p o rt io n o f t h e u n derp aym en ti s at tri b ut ab l e t o frau d , th e
en t i re u n d erp aym en twi l l b e t reat ed as at tri bu t ab l e t o frau du n l es s th e t ax pay er
es t ab l i s h es b y

a p rep o nd eran ce o f t h e ev i d en ce t h atp arto f t h e u n d erp aym en ti s
n o tdu e t o frau d . Sec. 6 66 3 (b ); s ee al s o M i n ch em In t ’ l , In c. v . Co m

m i ss i o ner, at* 4 3 -* 4 4
. Res p o n d en th as th e b u rd en o f p ro v i n g frau db y cl ear an d co n v in ci n g
ev i d en ce. See s ec. 7 4 5 4 (a); Ru l e 1 4 2 (b ). To carryth atb u rd en o f p ro of,
res p o n d en t m

u s ts h o w, fo r each y ear, t h at(1 ) an u n derp aym en to f t ax ex i s t s an d (2 ) s o m e p o rt i on i s at tri bu t ab l e t o frau d . See Heb ran kv . Co m m i s s i o n er, 8 1 T.C. 6 4 0 , 6 4 2 (1 9 8 3); Ben av i d es & Co ., P.C. v . Co m m i s s io n er, T.C. M em o . 2 0 1 9 -1 1 5 , at* 3 1
. Frau d i s a qu es t io n o f factt o b e res o lv edup o n co n s i d erat i o no f t h e en t i re
reco rd . Di Leo v . Co m

m i s s i o n er, 9 6 T.C. at8 7 4 . Frau di s n ev er p res um ed an d- 5 3 -

[* 5 3 ] m us tb e es t ab l i s hedb y

i n d ep en d en tev i d en ce. M i n ch em In t’ l , In c. v . Co m m i s s i o n er, at* 4 5
. Pet i t i o ner fai l edt o rep o rti t em s o f i n co m e an d cl ai m ed d edu ct i o n s t o wh i ch i t w as n o ten t i t l ed fo r al l y ears ati ss u e, an dan u n d erp aym en to f t ax th erefo re
ex i s t s fo r each y ear. Th e fi rs tel em en to f t h e frau d p en al ty h as th us b een
es t ab l i s h ed . Th e Co urt m us t n ex td et erm i n e wh et h er p et it i o n er h adth e req u i s i te frau du l en t i n t en t . Becau s e d i rect ev i den ce o f frau du len ti nt en ti s s el d o m av ai l ab l e, frau d m ay

b e p ro v en b y

ci rcu m s t an t i al ev i d en ce an dreas o n ab le i n feren ces drawn fro m th e fact s . Ni ed ri n g h au s v . Co m m i s s i o n er, 9 9 T.C. 2 0 2 , 2 1 0 (1 99 2 ); Ben av i d es & Co ., P.C. v . Co m m i s si o ner, at * 3 4 . Th e t ax p ay er’ s en ti re co u rs e o f
co n du ct m ay

b e i nd i cat iv e o f frau du l en ti n t en t. Ben av i d es & Co ., P.C. v
. Co m m i s s i o n er, at* 3 4 . A co rp orat i o nact s o n l y th ro u g h i t s o ffi cers an d can n o t
es cap e res p o n s i b i l i ty fo r t h ei r act s i nth atcap aci ty . Di L eo v . Co m m i s si o n er, 9 6 T.C. at8 7 5 ; Ben av id es & Co
. , P.C. v . Co m m i s s i o ner, at * 3 5 . Wh et h er p et it i o n er’ s i n t en twas frau du l en tth erefo re d ep en ds up o nth e i n t en to f M r. an dM rs . Hack er, i t s o n l y s h areh o ld ers an do ffi cers . Ci rcu m s t an ces th at m ay

i n d i cat e frau dul en ti n t en t, co m m o n l y referred t o as

“ b ad g es o f frau d ,” i n cl u d e b u tare n o tl i m i t edt o (1 ) u n d ers t at in g i n co m e; (2 ) m ai n t ai n i n g i n ad equ at e reco rd s ; (3 ) g iv i n g i m p l au s i b l e o r i n co n si s t en t- 5 4 -

[* 5 4 ] ex pl an at io n s ; (4 ) co n ceal i n g i n co m e o r as s et s ; (5 ) fai l i n g t o co o perat e wi th
au th o ri t ies ; (6 ) en g ag i n g i n i l l eg al act i vi t i es ; (7 ) p ro vi d i ng i n co m p l et e o r
m i s l ead i n g i nfo rm at i o n t o o n e’ s t ax retu rn p rep arer; (8 ) l acko f cred i b i l i ty o f t h e t ax p ay er’ s t es t i m on y ; (9 ) fi l i n g fal s e d o cu m en t s , i n cl u d i n g fal s e i n co m e t ax retu rn s ; (1 0 ) fai l i n g t o fi l e t ax retu rn s ; an d(1 1 ) d eal i n g i ncas h . M i n ch em In t ’ l , In c. v . Co m

m is s io n er, at* 4 6 . No s i n g l e fact or i s d i sp o si t iv e; h o w ev er, t h e
ex i s t en ce o f s ev eral fact o rs “ i s p ers u as iv e ci rcu m st an t i al ev i d en ce o f frau d .” Van ov er v . Co m

m is s io n er, T.C. M em o . 2 0 1 2 -7 9 , 2 0 1 2 W L 9 5 28 7 1 , at* 4
. Onrev i ew o f t h e fact s o f t h i s cas e, t h e Co u rtco n cl u d es th at res p on d en th as
n o tm etth e b urd en t o s h o w th atp et i ti o n er h ad th e frau dul en ti n t en t n eces s ary fo r th e i m p o si t i o n o f p en al t i es u nd er s ect i on 6 6 6 3 (a). Res p o n d en tem p h as i zes a
n u m b er o f t h e b ad g es o f frau d t h at , res p on d en tco n t en d s , d em o n s trat e p et i t i o n er’ s frau du l en t i n t en t , i n cl u d i n g i t s fai lu re t o rep o rtcas h recei p t s, th e cl ai m i n g as b u s i n es s ex p en s es o f t h ou s an d s o f d o ll ars i np ers o nal ex p en ses , an dM r. Hack er’ s
v ag ue, m i s l ead i n g , o r un co rro b o rat eds t at em en t s t o RA Fl o y d . Pet i ti o n er’ s
reco rd k eep i n g cert ai n l y

l eftm u ch t o b e d es i red , b u t th e fai l u res (l os s o f recei p t s , d ep os i t i n g ch eck s i n t h e wro ng b an kacco un t s , l acko f fo rm al ag reem en ts b et ween p et i t i o n er an dth e Hack ers ’ rel at eden t i ty ) ap p ear t o s t em m o re fro m

s l op p in es s
an d a l acko f s op h i s t i cat i o n th anfro m an effo rt t o d efeat t ax . An d wh i l e i t i s tru e- 5 5 -

[* 5 5 ] th atp et i t i o n er u n d ers t at edi t s g ro s s recei p t s fo r 2 0 06 an d2 0 07 , i ti s al s o tru e th atp et i t i o n er o vers t at edi t s recei p t s fo r 2 0 0 4 an d2 0 0 5 . Inad di t i o n p et i t io n er d i d
co o perat e du ri ng th e ex am i n at i o ni nth at , b eg i n n i n g M arch 2 00 8 , i tco n s en t edt o
ex t en dres p o n den t ’ s t i m e t o as ses s t ax b y ex ecu t i n g t h e Fo rm s 8 7 2 fo r 2 0 04 th ro u g h 2 0 0 7 , th ereb y

al l o wi n g t i m e t o co m

pl et e t h e ex am i n at i o n . Reg ard i n g th e i n ap p ro p ri at e d edu ct i o ns , res po n d en t i s co rrect th at p et i t i o n er cl ai m edl arg e d educt i o n s fo r ex p en s es ei th er t hatwere p ers o n al o r t h atl ack eda d em o n s trat edb u s i n es s p u rp o se, an dth e Co urth as s u st ai n edres p o n d en t ’ s d i s al lo wan ce o f s u ch d edu ct i o ns i nl arg e p art . Ho wev er, p et i t i o n er m ai n t ai n eda
ru n n in g b al an ce, rep o rt edo n i ts retu rn s as “N ot e Recei vab l e fro m Offi cers .” Th e b al an ce o f t h e p u rp o rt edn o t e i ncreas edfro m $ 2 3 6 ,1 8 9 atthe b eg in ni n g o f 2 0 0 4 t o $ 1 ,3 3 2 ,0 0 6 atth e en d o f 2 0 07 , an i n creas e t h atcl o s el y track s the cred i t card
ex p en d i tu res res p o n d en td et erm i n edt o b e p ers o n al ex p en s es . Pet i t i o n er’ s
reco rd i n g an drep o rt i n g o f t h e ex p en s es i n d i cat es an ack n o w l ed g m en to f t h ei r p ers o n al n atu re an dan i n ten t i o n t o rep ay o r reco g n i ze as d i vi d en d s th e d eem ed d i s tri b u t edam o un t s ats o m e p o i n t i nth e fu tu re, al b ei tan u n s p eci fi edan d i n d et erm i n at e o n e.- 5 6 -

[* 5 6 ] In s u m , th e Co u rtd oes n o tb el iev e t h atth e ev i d en ce p res en t edri s es t o th e l ev el o f “ cl ear an dco n v i n ci n g ” n eces s ary t o s up p o rtan i m

p os i t i o no f s ect io n 6 6 6 3 (a) frau d p en al t i es fo r t h e y ears ati ss u e.

2
. Sect io n 6 6 6 2 (a) Accu racy -Rel at edPen al t i es In th e al t ern at i v e, res p on d en tco n t en d s th atp et i t i o n er i s l i ab l e fo r
accu racy -rel at edp en al ti es p u rs u an tt o s ect i o n6 6 6 2 (a) fo r t h e y ears at i s s ue. Sect i o n 6 6 6 2(a) an d(b )(1 ) an d (2 ) i m p o s es an accu racy -rel at edp en al ty equ al t o 2 0 % o f t h e p ort io n o f an u nd erp aym en to f t ax req u iredt o b e s h o wno na t ax retu rn th ati s at tri b u t ab l e t o “ [n ] eg l i g en ce o r d is reg ardo f ru l es o r reg u l at i o n s ” o r a

“ s ub s t an t i al u n d ers t at em en to f i n co m e t ax .” Neg l ig en ce i n cl u des “ an y fai l u re t o
m ak e a reas o n ab l e at t em

p tt o co m p l y wi th th e p ro vi s i o n s o f t h i s t i t l e”. Sec. 6 6 62 (c). In the cas e o f a co rp o rat i o n , an u n d ers t at em en to f i n co m e t ax i s a

“ s ub s t an t i al u n d ers t at em en t ” i f i tex ceed s t h e l es s er o f 1 0 % o f th e t ax req u i red t o b e s h own o n th e retu rn fo r t h e t ax ab l e y ear (o r, i f g reat er, $ 1 0 ,0 00 ), o r $ 1 0
m i l l io n . Sec. 6 6 6 2 (d )(1 )(B). Pet i t i o ner’ s o n l y

arg u m en tag ai n s t i m

po s it i on o f t h e accu racy -rel at ed p en al t i es i s th atres p o n d en th as n o tm eth i s b u rd en o f p ro duct i o nt o s h o w
co m p l ian ce wi th the s up erv i so ry ap p ro v al req u i rem en to f s ect io n6 75 1 (b ). Pet i t io n er’ s arg u m en ti s m i s p l aced . Th e b u rd eno f p ro du ct i o n as t o p en al t i es- 5 7 -

[* 5 7 ] rem ai n s wi th p et it i o n er b ecau s e s ect i o n 7 4 9 1 (c) d o es n o tap p ly t o
co rp o rat i o ns . See, e.g ., NT, In c. v . Co m m i s s i o n er, 1 26 T.C. 1 9 1, 1 9 5 (2 0 0 6 ). Th e Co u rth as p rev i o u s ly

h el dth atth e Co m

m i s si on er d o es n o tb ear t h e b u rd en o f p ro duct i o n as t o the s up erv i s o ry ap p ro val req ui rem en tu n der s ect i o n6 7 5 1 (b ) fo r a p en al ty d et erm i n ed ag ai ns t a co rp o rat i o n . Dy n am o Ho l d in g s Lt d . P’ s hi p v . Co m m i s s i o n er, 1 5 0 T.C. 2 2 4 , 2 3 1 -2 3 2 (2 0 1 8). Al th ou g h res p o n d en td o es n o tb ear t h e b u rd en o f p ro du ct io nwi th res p ectt o p en al t i es as s ert edag ai n s tn on i n d i vi du al t ax p ay ers , s u ch t ax p ay ers m ay rai s e t h e l acko f s up erv i s o ry

ap p ro v al as an affi rm at iv e d efen s e t o p en al t i es . See Pal m o l i v e Bl d g. In v ’ rs , LLC v . Co m m i ss i o n er, 1 5 2 T.C. 7 5 , 8 3 (2 0 1 9 ); En deav o r Part n ers Fu n dv . Co m

m i s s io n er, T.C. M em o . 2 0 1 8 -9 6 , at* 6 3 -* 64 , aff’ d , 9 4 3 F.3 d4 6 4 (D.C. Ci r. 2 0 1 9 ). Pet i t i on er rai s edth e qu es t i o n o f s up erv i s ory ap p ro v al fo r t h e fi rs tt i m e o n b ri ef. It d i dn o trai s e t h e affi rm at i ve d efen s e i ni t s p l ead i n g s , as req u i redu n d er Ru l e 3 9 , n o r h as i ts o u g h tl eav e t o am en di t s p l ead i n g s p u rs u an tt o Ru l e 4 1
. M o reo v er, res p o n d en th as i n tro du cedi n t o ev i den ce a co p y o f th e an s wer i n th i s cas e, s i g n edo n Ap ri l 4 , 2 0 1 2 , b y th e i m m ed i at e s up erv i so r o f res po n d en t ’ s- 5 8 -

[* 5 8 ] co un s el
. 1 1 See Ko h v . Co m m i s s i o n er, T.C. M em o . 2 0 2 0 -7 7 , at* 5 -* 6 (co n cl u d i n g th atres p o nd en t ’ s co u n s el m ay m ak e t h e i n i t i al p en al ty

d et erm i n at i o n fo r p u rp o s es o f s ect i on 6 7 5 1 (b )(1 ) i nan an s wer). Th e an s w er refl ect s
res p o n d en t’ s as s ert i o n o f t h e accu racy -rel at edp en al t i es u nd er s ect i on 6 6 6 2(a) fo r
n eg li g en ce an ds ub s t an t i al u n ders t at em en ts o f i n co m e t ax . Th ere i s n o ev i d en ce i n th e reco rdt o s ug g es t , an dp et i t i o n er d o es n o t al l eg e, t h atres p o n d en t
co m m u n icat edh i s i n it i al p en al ty d et erm i n at io nt o p et i ti o n er b efo re t h e d at e rep res en t edi n th e an swer. See Cl ay v . Co m m is si o n er, 1 5 2 T.C. 2 2 3 , 2 4 9 (2 0 1 9 ), aff’ d , 9 9 0 F.3 d1 2 9 6 (1 1 th Ci r. 2 0 2 1 ). Pet i t i o ner d o es n o trai s e an y o th er ch al l en g es t o th e p en al ti es . Th e freq uen cy , n atu re, an dp erv as i v en es s o f t h e ad ju s t m en t s g i v i n g ri s e t o th e d efi ci en cy

i n thi s cas e l eav e l i t t l e qu es t i o nthatp et i t i o n er d is reg ard edth e ru l es an d reg u l at i o n s an d fai l edt o m ak e a reas o n ab l e at t em p tt o co m p l y wi th th e Co d e. Pet i t io n er d o es n o targ u e, an dth e reco rdd o es n o ts h o w, th atp et i t i o n er h ad

1 1 OnOct o b er 6 , 2 0 17 , res p o n d en t fi l eda m o t i o n t o reo p en th e reco rdt o s ub m i tad d i t io nal ev i d en ce. At t ach edt o th e m o t i o nwas , am o n g o th er d o cu m en t s , th e d ecl arat i on o f El i zab et h Do wn s , th e i m m ed i at e s uperv i s o r o f res po n d en t ’ s co u ns el i n th i s cas e, an d a co p y o f res p on d en t ’ s an s wer, s i g nedb y M s . Do wn s an d ap p ro v i n g th e as s ert i o n o f t h e p en al t i es ati s s u e h erei n . Th e Co u rtg ran ted res p o n d en t’ s m o t i o n b y o rd er d at edJ u ly 1 , 2 0 2 1
.- 5 9 -

[* 5 9 ] reas o n ab l e cau s e fo r i t s u n d erp aym en t s . Acco rd i ng l y , th e accu racy -rel at ed p en al t i es are s u s t ai ned
. IX. Co n cl u si o n Pet i t i o ner i s l i ab l e fo r d efi ci en ci es fo r 2 0 0 4 , 2 0 0 5, 2 0 0 6 , an d2 0 0 7 t o th e
ex t en td i s cu s s edh erei n . Res p on d en t ’ s d et erm i nat i o n s o f accu racy -rel at ed p en al t i es fo r al l y ears an dan ad d i t i o nt o t ax fo r 2 0 0 7 are s u s t ai n ed . Th e Co u rth as
co n si d eredal l o f t h e arg u m en t s m ad e b y th e p art i es an d t o th e ex t en t they are n o t ad dres s edh erei n , th ey are co ns i d eredu n neces s ary , m o o t , i rrel ev an t , o r o th erwi s e wi th o u tm eri t
. To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5 i nd o ck et No . 3 8 6 8 -1 2
.