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

UNITED STATES TAX COURT

M AGLOIRE K. AYISSI-ETOH AND KATRINA D. SHARPE, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 3 1 0 90 -1 5
. Fi l edJ u l y 9 , 2 0 1 8.

M ag l o i re K. Ay i s s i -Et oh an dKat ri n a D. Sh arp e, p ro s es e. Rach el L. Ro l l i n s an dJ effreyE. Go l d , fo r res p o n d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION LAUBER, J u d g e: W i th res p ectt o p et i t i o ners ’ 2 0 1 2 an d2 0 1 3 t ax ab l e y ears , th e In t ern al Rev en u e Serv i ce (IRS o r res p o n d en t ) d et erm i n edth e fo l l o wi n g d efi
ci en ci es an d accu racy -rel at edp en al t i es :- 2
-
Year Defi ci en cy Pen al ty

s ec. 6 6 62 (a) 2 0 1 2 $ 2 5 ,0 8 3 $5 ,0 1 7 2 01 3 4 9,0 2 8 9 , 8 06 Th e i s s u es fo r d eci si o n are wh et h er p et i t i o n ers : (1 ) u n d errep o rt ed a t ax ab l e refu ndo f St at e i n co m e t ax ; (2 ) are en t i t l edt o d edu ct i o n s cl ai m edo nSch edu l es C, Pro fi to r Lo s s Fro m

Bu s i n es s ; (3 ) are en t i tl ed t o d edu ct io n s cl ai m ed o nSch edu l es A, It em i zedDedu ct i on s , fo r ch ari t ab l e co n tri b ut i o n s an d u nrei m b u rs ed em

p l o y ee
ex p en s es ; (4 ) are l i ab l e fo r s el f-em p l o ym en tt ax o nwag es recei v ed fro m an i n t ern at i o n al o rg an i zat i o n ; an d(5 ) are l i ab l e fo r accu racy -rel at ed p en al t i es . W e res o l v e al l i s s u es i n res p o n d en t ’ s fav o r. 1 FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s an dth e at t ach ed ex h i b i ts are i n co rp o rat ed b y th is referen ce. Pet i t i o n ers res i dedi n M ary l an dwh en th ey p et i t io n edth is Co u rt . Du ri n g 2 0 1 2 -2 0 1 3 p et it i o n er h us b an d wo rk edfu l l t i m e fo r t he In t ern at i o n al M o n et ary Fu nd(IM F) i n W as h i n g t o n , D.C., s erv i n g as an ad v i ser t o an ex ecu t i v e [* 2 ]

1 Al l s t atut o ry

referen ces are t o th e In t ern al Rev en u e Co de (Co d e) i neffect fo r t h e t ax y ears ati s s u e, an d al l Ru l e referen ces are t o th e Tax Co u rtRu les o f Pract i ce an d Pro cedu re. W e ro u n dal l m o n et ary am o u nt s t o th e n eares td o ll ar.- 3
-

[* 3 ] d i rect o r. Fo r tho s e s erv ices h e recei v edwag es o f $ 62 ,2 3 8 i n2 0 1 2 an d $ 2 0 6 ,8 1 1 i n 2 0 1 3
. Th e IM F d i dn o twi th h o l dFed eral i n co m e t ax o r em p l o ym en t t ax fro m th es e wag es . In 2 0 0 9 p et it i on er h u s b an dfo rm edAm eri can M an ag em en t& Co n s u l t i n g LLC (AM C). He al l eg ed l y p erfo rm edco n s u l t i n g s erv i ces th ro u g h AM C, b u th i s t es t i m o ny ab ou tthe n atu re an dt i m i n g o f t h es e s erv ices was v ag u e. He fi rs tt es t i
fi edthath i s co n s u l t i ng i n v ol v edp en si o np lan s b u tl at er t es t ifi edth atAM C was i n v o l v ed i n at t em

p t i n g t o b u i l dan o i l refi n ery i nHai t i . AM C rep o rt edn o g ro s s recei p t s du ri n g 2 0 1 2 o r 2 0 1 3 o r (as far as th e reco rds h o ws ) i nan y o th er y ear. In No v em

b er 2 0 1 2 p et it i o n er h us b an d fo rm ed , an ddu ri n g 2 0 12 -2 0 1 3 h e
was ch ai rm an o f, Am eri can M an ag em en t& Co n s u l t i ng Fo u n d at i o n, In c. (AM C Fo u n d at i o n ). Pet i t i o ners du ri n g 2 01 2 -2 01 3 al l eg ed l y m ad e ch ari t ab l e co n tri b u t i on s t o AM C Fo u n d at i o n , wh i ch p u rp ort ed l y d i rect ed th o s e fu n ds t o p ro j ect s i n
s ub -Sah aran Afri ca. Atn o t i m e du ri n g 2 0 12 -2 0 13 was AM C Fo u nd at i o nreco g n i zedb y th e IRS as a t ax -ex em

p tch ari t ab le o rg an i zat i o nu n d er s ect i o n5 0 1(c)(3 ). Du ri n g 2 0 1 2 -2 0 1 3 p et it i o n er wi fe wo rk edfo r Lei d o s , a d efen s e co n tract o r. Sh e p ai dcert ai n wo rk -rel at edtrav el ex p en ses , al l o f wh i ch were fu l l y rei m b u rs ed b y h er em p l o y er. Sh e o ccas i o nal l y wo rk edfro m a h o m e o ffi ce, b u tp et i t i o n ers- 4
-

[* 4 ] al s o u sedth atro o m

fo r a v ari et y o f p ers o nal an dfam il y p u rp o s es . Pet i t i o n er wi fe h ad n o i n v ol vem en twi th AM C o r t h e AM C Fo u n d at i o n. Pet i t i o ners p ai dM ary l an di n co m e t ax es duri n g th e y ears at i s s ue. In 2 0 1 3 th ey recei v eda refu n do f $ 9 ,3 23 fro m M ary l an d. Th e p art i es h av e s t i pu l at edth at th i s am o u n tco n s t i tu t eda refu n do f p aym en t s p et i t i o n ers h adm ad e t o ward th ei r 2 0 1 2 M ary l an di n co m e t ax l i ab i l i ty . Pet i t i o ners t i m el y

fi l edFo rm s 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn , fo r 2 0 1 2 an d2 0 1 3 . Onth os e ret u rn s th ey rep o rt edth e wag es p et i t i o n er h u s b an dh ad recei v edfro m

the IM F, b u tthey

d i dn o t rep orto r p ay

an y s el f-em p l o ym en t t ax o n th es e wag es . Onth ei r 2 0 1 3 retu rn th ey rep o rt ed$ 6 ,6 0 1 as a t ax ab l e refu n do f St at e i nco m e t ax . Pet i t i o ners i n cl u d edi n each retu rn a Sch edu l e C fo r AM C. Onth es e Sch ed
u l es C t h ey

rep o rt edzero g ro ss recei p t s fo r each y ear an d ex p en s es as fo l l o ws :

It em 2 0 1 2 2 0 1 3 M eal s an d en t ert ai n m en t $ 1 1 0 $ 1 5 0 Tax es an dl i cen s es 3 0 0 3 0 0 Sup p l i es 2 6 5 3 0 0 Rep ai rs an dm ai n t en an ce 6 0 4 0 Offi ce ex pen s es 6 0 5 0 Dep reci at i o n an ds ec. 1 7 9 ex p en se 2 0 0 --- Ad v ert i si n g 1 2 5 1 2 4 Trav el 2 ,4 8 6 1 1 ,7 0 0- 5
- Car an dtru ck

ex p en s es 1 7 ,6 3 3 2 0 ,5 2 7 Ex p en s es fo r b u s i n es s u s e o f h o m e 1 2 ,3 7 0 5 ,4 6 6 Oth er ex p en ses 1 4 0 2 5 0 Ut i l i t i es 2 ,1 4 0 1 ,3 8 0 To t al 3 5 ,8 8 9 4 0 ,2 8 7 Pet i t io n ers al s o i n cl u d edi n each retu rn a Sch edu le A, o nwh i ch th ey rep o rt ed (am o n g o th er t hi n g s ) t h e fo l l owi n g i t em s: It em 2 01 2 2 0 13 Cas h ch ari t ab l e co n tri b u t i on s $ 21 ,3 0 0 $ 5 5 ,4 00 No n cas h ch ari t ab le co n tri b ut i o n s 14 ,0 0 0 9 ,2 80 Un rei m b urs edem

pl o y ee ex p en s es 23 ,2 8 8 1 5 ,2 82 Th e IRS s el ect edb ot h retu rn s fo r ex am in at i o n . As a res u l to f t h i s ex am i n at i on th e IRS: (1 ) d et erm i nedthatp et i t i on ers i n2 0 1 3 h adrecei veda t ax ab l e St at e i n co m e t ax refu n do f $ 7 ,1 65 (o r $ 5 6 4 m o re t h anth ey h adrep o rt ed ); (2 ) d i s al l o wed al l cl ai m edSch edul e C d educt i o n s fo r l acko f s ub s t an t i at i o nan db ecau se AM C
was n ot“ an act i vi ty

en g ag edi n fo r p ro fi t ” wi th i n t h e m ean i n g o f s ect i o n1 8 3 (a); (3 ) d i s al l o wed fo r l acko f s ub s tan t i at i o nal l cl ai m edd edu ct i o n s fo r cas h ch ari t ab l e
co n tri b u t i o n s an dal l cl ai m edd edu ct i o n s fo r n o n cas h ch ari tab l e co n tri b u ti o n s i n
ex ces s o f $ 2 5 0 an n u al l y ; (4 ) d is al l o wedfo r l acko f s ub s tan t iat i on an d b u s i n es s p u rp os e m o s tcl ai m edd edu ct i o n s fo r u n rei m b urs edem

p l o y ee ex pen s es ; (5 ) d et erm i n ed th atp et it i o n er h u sb an dwas l i ab l e fo r s el f-em p l o ym en t t ax , i nth e am o u n t s [* 5 ]- 6
-

[* 6 ] o f $ 7 ,6 4 4 an d$ 1 9 ,6 3 8 , fo r 2 0 1 2 an d2 0 1 3 , res pect i v el y , o nh i s wag es fro m th e IM F; an d(6 ) d et erm i nedaccu racy -rel at edp en al t i es fo r b o th y ears . OnSep t em

b er 9 , 2 01 5 , th e IRS i ss u edp et i t io n ers a t i m el y n o t i ce o f d efi ci
en cy s et t in g fo rt h thes e ad

ju s t m en t s , an dth ey

t i m el y p et i t io n edthi s Co u rtfo r red et erm i n at i o n . Atth e cl o s e o f t ri al th e Co u rt d irect edth e p art i es t o fi l e s eri at i m p o s t -t ri al b ri efs . Pet i t i o n ers fai l edt o fi l e a b ri ef as d i rect edb y the Co u rt . 2 OPINION I. Bu rd en o f Pro o f Th e IRS’ d et erm i n at i o ns i n a n o t i ce o f d efi ci en cy are g en eral l y

p res u m ed
co rrect , an dt ax pay ers b ear t h e b u rd eno f p ro vi n g t h em erro n eo u s . 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). Pet i t i o n ers d o n otco n t en d(an d
co u ldn o tp l au s i bl y

co n t en d ) t h atth ey

h av e s at i s fi edthe req ui rem en t s o f s ect i o n 7 4 9 1 fo r s h i ft i n g th e b urd en o f p ro o f. See Ru l e 1 42 (a)(1 ) an d (2 ). Acco rd i n g l y , th e b u rd en o f p ro o f fo r al l fact u al i s su es rem ai n s wi th th em .

2 Becau s e p et i t i o n ers fai l edt o fi l e a b ri ef as d i rect edb y the Co u rt , we co u l d en t er d eci s i o n ag ai ns tth em fo r th atreas o nal o ne. See Ru l e 1 2 3 (b ); St ri n g er v . Co m m i s s i o n er, 8 4 T.C. 6 93 , 7 0 8 (1 9 8 5 ), aff’ d wi th o u t p ub l is h edo pi n i o n , 7 8 9 F.2 d9 1 7 (4 th Ci r. 1 9 8 6).- 7
-

[* 7 ] II. St at e In co m e Tax Refu n d Gro s s i n co m e g en eral l y

i n cl ud es i n co m e fro m

wh at ev er s o u rce d eri v ed . See
s ec. 6 1 (a); Co m

m is s i o n er v . Gl en s h aw Gl as s , 3 4 8 U.S. 4 26 (1 9 55 ). Un d er th e t ax b en efi tru l e, g ro s s i nco m e m ay i n cl u d e t h e reco v ery

o f an am o u nt thatg av e ri s e t o a t ax b en efi ti n a p ri o r y ear. See s ec. 1 1 1 (ex cl ud i ng fro m g ro s s i n co m e t h e reco v ery o f am o u n t s d educt edi n a p ri o r y ear t h atg av e ri s e t o n o t ax b en efi t ); M ai n es
v . Co m m i s s i o n er, 1 4 4 T.C. 1 23 , 1 3 0 -1 3 1 (2 01 5 ). Onth ei r 2 0 1 2 Fed eral i n co m e t ax retu rnp et i t io n ers cl ai m edan dwere al
l o weda d edu ct i on o f $ 7 ,1 6 5 fo r St at e an dl o cal i n co m e t ax es p ai d t o M ary l an d . In 2 0 1 3 they recei v edfro m

M ary l an da refu n do f $ 9 ,3 2 3 at tri b u tab l e t o 2 0 12 . Res p o n den tco n t en d s t h atfo r 2 01 3 th ey h av e g ro s s i n co m e o f $ 7 , 1 65 , th e am o u n to f d educt i o n al l o w edfo r t h e p ri or y ear. Attri al p et it i on ers co n t en d edth at$ 2 ,7 2 2 o f t h e refu ndco rres p o nd edt o a t ax p aym en tth ey

m ad e t o M ary l an di n2 0 1 3, l eav in g o n l y $ 6 ,6 0 1 as a t ax ab l e reco v ery o f t h e d edu ct i o n cl ai m edfo r 2 0 1 2
. As res p o nd en t n o tes , p et i t i o ners h av e
s up p li edn o ev i d en ce co n cern i ng th e am o u n to f t h ei r 2 0 1 3 t ax p aym en t t o M ary l an d . M o reo ver, b ecau s e t h ey n eg l ect edt o fi l e a p o s t -t ri al b ri ef, t h ey h av e n o t reb u t t edres p o n d en t ’ s al t ern at i v e arg u m en t th atth e refu n dm u s tb e al l o cat edp ro rat a acro ss al l t ax p aym en t s . W e co n cl u d e t h atp et i t i o n ers h av e n o t carri edth ei r- 8
-

[* 8 ] b u rd en o f s h o wi n g erro r i n res p o n d en t ’ s d et erm i n at i on th at fo r 2 0 1 3 th ey
u n d er-rep o rt edb y

$ 5 6 4 th e t ax ab l e refu n d t h ey recei v edfro m

M ary lan d
. III. Sch edu l e C Ex p en s es Dedu ct i o n s are a m at t er o f l eg i s l at i v e g race. Th e t ax p ay er b ears the b u rd en
o f p ro v i n g th atrep o rt ed b u s i n es s ex p en s es were act u al l y i n cu rred an dwere “ o rd i
n ary an dn eces s ary .” Sec. 1 62 (a); Ru l e 1 4 2 (a); 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 ). Th e t ax p ay er m u s t s ub s t an t i at e t h e ex p en ses u n d erl y i n g h i s cl ai m edd edu ct i o n s b y k eep i n g an dp ro duci n g reco rd s s uffi ci en t t o en ab l e t h e IRS t o d et erm i n e t h e co rrect t ax l i ab i l i ty . Sec. 6 0 0 1 ; s ec. 1 .6 0 0 1 -1 (a), (e), In co m e Tax Reg s . Th e fai l ure t o k eep an dp res en ts u ch reco rd s co u n t s h eav i l y ag ai n s t a t ax p ay er’ s at tem

p t ed p ro o f. Ro g ers v . Co m m is s i o n er, T.C. M em o . 2 0 1 4-1 4 1 , 1 0 8 T.C.M . (CCH) 3 9 , 4 3
. In o rd er t o d edu ctb u s in es s ex p en s es u n d er s ect i o n1 6 2 , th e t ax p ay er m u s t carryo n a t rad e o r b u s in es s . Anact i v i ty i s a t rad e o r b us i n es s i f t h e t ax p ay er i s
en g ag edi n th e act i v i ty

fo r th e p ri m ary

p urp o s e o f m ak i n g a p ro fi t . Ab s en tth at
s h o wi n g , ex p en s es are d edu ct i b l e o n l y t o th e ex t en to f i n co m e d eri v edfro m th e act i vi ty . Sec. 1 8 3 (b )(2 ); s ee Drei cer v . Co m m i s s i o n er, 7 8 T.C. 6 4 2 , 6 4 5 (1 9 8 2 ), aff’ dwi th o u tp ub l i s h edo p i n i o n , 7 0 2 F.2 d1 2 0 5 (D.C. Ci r. 1 9 8 3 ); Go l an ty v . Co m m i s s i o n er, 7 2 T.C. 4 1 1, 4 2 6 (1 9 7 9 ), aff’ dwi tho u t p ub l i s h ed o p i n io n , 6 4 7 F.2 d1 7 0- 9
-

[* 9 ] (9 th Ci r. 1 9 8 1 ). Th e ex i s t en ce o f a p ro fi t m ot i ve tu rn s o nth e t ax p ay er’ s
s ub ject i ve i n t en t , b u ti n d i s cern i n g th ati n ten t we g i v e l es s wei gh t t o s el f-s erv i n g
s t at em en t s th an t o o b

ject i v e fact s . Sec. 1 .1 8 3 -2 (a), In co m e Tax Reg s. Rel ev an t
o b ject i ve fact o rs i n cl u d e (am on g o th er t h i n g s ) t h e t im e, effo rt , an d m an n er i n wh i ch th e t ax p ay er carri es o n th e act i v i ty an dwh et h er t he t ax p ay er h as h ada h i s t o ry o f fi n an ci al s ucces s i n carry i n g o n t h e act i v i ty o r rel at edact i v i t i es . Sec. 1 .1 83 -2 (b ), In co m e Tax Reg s . Pet i t i o ners h av e p ro v i d edn o ev i d en ce, o th er t h anp et i t i o n er h u s b an d ’ s s el fs erv i ng t es t i m o n y , th atAM C was o p erat edfo r th e p urp o se o f m ak i ng a p ro fi t . It h ad n o g ro ss recei p t s du ri n g 2 0 1 2 o r 2 0 1 3 , an d (as far as th e reco rd s ho ws ) i tg en erat edn o p ro fi ti n an y

y ear. Pet i t i o ners h av e s up p l i edn o ev i d en ce t h at AM C h ad a b an k acco u n t , b o o ks an dreco rd s , b u s i n es s p l an s , m ark et i n g s trat eg ies , o r cu s t o m er l i st s . Th ere i s n o ev i d en ce t h atAM C carri edo nb u s i n es s act iv i ty duri n g th e y ears ati s s u e o r h el di ts el f o u tas a g o i n g co n cern . Becau se AM C h adn o g ro s s i n co m e du ri n g 2 0 12 o r 2 0 1 3 , th e IRS p ro p erl y d en i edu n d er s ect io n 1 83 (a) al l d edu ct i o n s cl ai m edo n p et it i o n ers ’ Sch edu l es C. Ev en i f p et i t i o n er h u s b an dh ada p ro fi t m o ti v e i no p erat i n g AM C, we wo u l d d en y th e cl ai m edSch edu l e C d edu ct i on s fo r l acko f s ub st an t i at i o n . Pet i t i o n ers p ro ducedn o ev i den ce wh at ev er t o s ub st an t i at e t h e d edu ct i o n s cl ai m edfo r t ax es- 1 0 -

[* 1 0 ] an d l i cen s es , rep ai rs an d m ai n t en an ce, s up p l ies , o ffi ce ex p en s e, d ep reci at i o n , ad vert i s i ng , u t i l i t i es , m eal s an d en t ert ai n m en t , “ o th er ex p en s es ,” o r h o m e o ffi ce ex p en s e. 3 Th ei r cl ai m edcar an d tru ckex p en s es are s ub jectt o th e
s tri cts ub s t an t iat i o n req u i rem en t s o f s ect i o n 2 7 4 (d ). See s ec. 2 8 0F(d )(4 ) (i ncl ud i ng p as sen ger au t o m o bi l es as “ l i st edp ro p ert y ”); Fern an d ez v . Co m m i s s i o n er, T.C. M em o . 2 0 1 1 -2 1 6 . Pet it i o n ers p ro du ceda ren t al car recei p t , wh i ch h adn o ap p aren t co n n ect i o nt o AM C’ s b u s i n es s , an da m i leag e l o g . Th e
m i l eag e l o g v ag u el y

d es cri b es al m o stev ery

tri p as i n v o l v i ng a “ b us i n es s p res en t at i o n ” o r “ m eet i n g .” Th es e d ocu m en ts fal l far s h o rt o f s at i s fy i n g the s tri ct req u i rem en t s o f s ect i o n 2 7 4 (d ). See s ec. 1 .2 7 4 -5 T(a), (b ), an d (c), Tem p o rary In co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 0 1 4 -4 6 0 1 7 (No v . 6 , 1 9 8 5). W e acco rd in g l y
s u s t ai n res p o n den t ’ s d is al l o wan ce o f al l Sch edul e C d educt i on s cl ai m ed wi th
res p ectt o AM C. IV. Sch edu l e A Dedu ct i o n s A. Ch ari t ab l e Co n tri b u t i on s Pet i t i o ners cl ai m ed d educt i o n s fo r cas h ch ari t ab le co nt ri b u t i on s o f $ 2 1 ,3 0 0
an d $ 5 5 ,4 0 0 an dfo r n o n cas h ch ari t ab l e co n tri b ut i o ns o f $ 1 4,0 0 0 an d$ 9 ,2 80 i n

3 Th e IRS d i s al l o wedth e d edu ct i on s cl ai m edfo r h o m e o ffi ce ex p en s e, b u t al l o wed a l arg er d edu ct i o n fo r h o m e m o rt g ag e i n t eres t o nSch edu l e A fo r each y ear.- 1 1 -

[* 1 1 ] 2 0 1 2 an d2 01 3 , res p ect i v el y . Fo r each y ear res p o n d en td i s al l o wedal l o f t h e
cas h co n tri b u t io n s an dal l b u t$ 2 5 0 o f t h e n o n cas h co n tri b ut i on s . Sect io n 1 7 0 al l o w s as a d edu ct i o nan y co n tri b u t i o n m ad e wi th i nth e t ax ab l e y ear t o a ch ari t ab l e o rg an i zat i o n . Sec. 1 7 0 (a)(1 ), (c). Su ch d edu ct i o n s are al
l o wab l e o n l y

i f th e t ax p ay er s at i s fi es s t atu t o ry an dreg ul at o ry

s ub st an t i at i o nrequ i rem en t s . See s ec. 1 7 0 (a)(1 ); s ec. 1 .1 7 0 A -1 3 , In co m e Tax Reg s . Th e n atu re o f th e req u i red s ub st an t i at i o n d ep en d s o nth e s i ze o f t h e co n tri b u t i o nan d o nwh et h er i t is a g i fto f cas h o r p ro pert y . Fo r co nt ri b ut i o n s o f an y

k i n d , th e t ax p ay er m

us tm ai n t ai nrel i ab l e reco rd s i n d i cat i n g (am o n g o th er t h i ng s ) t h e d o nee o rg an izat i o n an dth e v al u e an d d at e o f th e co n tri b u t i o n . See s ec. 1 .1 70 A-1 3 (a) an d (b ), In co m e Tax Reg s. Fo r al l co n tri
b u t i o n s o f p ro p ert y , th e t ax pay er m u s tm ai n t ai nrel i ab l e wri t t en reco rd s th ati n cl u d e t h e n am e o f t h e d o n ee, th e d at e an dl o cat i o n o f t h e co n tri b u t i on , an da d es cri pt i o n o f t h e p ro p ert y

“ i n d et ai l reas o n ab l e u n der t h e ci rcu m s tan ces .” Sec. 1 .1 70 A-1 3 (b )(2 )(i i )(A) t h ro u g h (C), In co m e Tax Reg s. Th e t ax pay er m u stal s o
m ai n t ai n reco rd s t o es t ab li s h “ th e fai r m ark et v al ue o f t he p ro p ert y atthe t i m e t h e
co n tri b u t i o n was m ad e” an d“ th e m et h odu t i l i zedi n d et erm in i n g t h e fai r m ark et
v al u e.” Id . s ub d i v . (i i )(D).- 1 2 -

[* 1 2 ] Fo r al l co n tri b u ti o n s v al u edat$ 2 5 0 o r m o re, t h e t ax p ay er m u s to b t ai na

“ co n t em p o ran eo u s wri t t en ackn o wl ed g m en t ” (CW A) fro m th e d on ee. Sec. 1 7 0 (f)(8 ). Th e CW A m

u sti n cl u d e (am o n g o th er t h i ng s ) a d es cri p t i o no f an y p ro p ert y o th er th an cas h co nt ri b ut ed . Id . s ub p ara. (B)(i ). In th e ab s en ce o f a CW A
m eet i n g th e s t atu te’ s req u i rem en t s , “ [n ] o d edu ct i o ns h al l b e al l o wed .” Id . s ub p ara. (A). Ad d it i on al s ub s t an t i at i o n req u i rem en t s are i m po s edfo r co n tri b u ti o n s o f p ro p ert y wi th a cl ai m edv al u e ex ceed i n g $ 5 0 0
. Sec. 1 7 0 (f)(1 1 )(B). St i l l m o re ri g oro u s s ubs t an t i at i o n req u i rem en t s are i m p o s ed fo r co n tri b ut i o n s o f p ro p erty wi th a cl ai m edv al u e ex ceed i n g $ 5 ,0 0 0 . Id . s ub p ara. (C). In d et erm i n i n g wh et h er d o n at i on s o f p ro p ert y

ex ceed th es e t h res ho l d s, “ si m i l ar i t em s o f p ro p ert y ” (o th er t h an
cas h an dp ub l i cl y

trad eds ecu ri t i es ) m

u s t b e ag g reg at ed . See i d. s ub p ara. (F). Th e t erm “ si m i l ar i t em s o f p ro p erty ” i s d efi n edt o m ean “p ro p ert y o f t h e s am e g en eri c cat eg o ry o r t y p e,” s u ch as cl ot hi n g o r el ect ro ni c eq u i pm en t . Sec. 1 .1 7 0 A1 3 (c)(7 )(i i i), In co m e Tax Reg s . If co n tri b u t edp ro p erty

i s v al u edi n ex ces s o f $ 5 00 , th e t ax p ay er m u s ti n cl u d e wi th h i s retu rn “ a d es cri p t i o no f s u ch p ro p ert y an ds u ch o th er i n fo rm at i o n as th e Secret ary

m ay req u i re.” Sec. 1 7 0 (f)(1 1 )(B). Th e Secret ary h as p res cri bedreg u l at i o n s req u i ri n g th atth e t ax p ay er m ai n t ai nreco rd s es t ab l i s h i n g “ [t ] h e m an n er o f- 1 3 -

[* 1 3 ] acq u i s i t i o n ” o f t h e p ro p ert y (e.g ., b y p u rch as e, g ift , o r i n h eri t an ce), th e ap p ro x i m at e d at e o f t h e p ro p ert y ’ s acq u i si t io n , an dth e co s to r ad ju s t edb as i s o f th e p ro p ert y . Sec. 1 .1 7 0A-1 3 (b )(3 )(i ), In co m e Tax Reg s .; s ee Gaert tn er v . Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -4 3 , 1 0 3 T.C.M . (CCH) 1 2 2 3 , 1 2 2 6
. If p ro p ert y

o r s i m il ar i t em s o f p ro pert y are v al u edi nex ces s o f $ 5 ,0 0 0 , th e t ax p ay er m

u s t s ub s t an t i at e t h e v al u e o f t he p ro p ert y wi th a “ qu al ifi edap p rai s al o f
s u ch pro p ert y .” Sec. 1 7 0(f)(1 1 )(C). He m u stal s o at t ach t o h i s retu rn a fu l l y co m p l et ed“ ap p rai s al s u m

m ary ” o n Fo rm

8 2 8 3, No n cas h Ch ari t ab l e Co n tri b u t io n s . See Co s t el l o v . Co m

m i s s io ner, T.C. M em o . 2 0 1 5-8 7 , 1 0 9 T.C.M
. (CCH) 1 4 4 1 , 1 4 4 5 ; s ec. 1
. 1 7 0 A-1 3 (c)(2 )(i )(B), In co m e Tax Reg s . Th e b u l ko f p et i t i o n ers ’ al l eg edcas h co n tri b u t i o n s ($ 1 4 , 1 00 fo r 2 01 2 an d $ 4 0 ,6 0 0 fo r 2 0 1 3 ) were p u rp o rt ed l y m ad e t o AM C Fo u n dat i o n . Bu tAM C Fo u n d at i o n was n o ta qu al i fi ed o rg an i zat i o nu n der s ect i o n1 7 0 (c) duri n g th e y ears at i s su e. Th e IRS d i d n o ti s su e a d et erm i n at io nl et t er reco g ni zi n g AM C Fo u nd at i o n
as t ax -ex em

p tu n d er s ect i on 5 01 (c)(3 ) u n t i l M ay 2 0 1 6, wi th an effect i v e d at e o f
ex em p t i o n o f No v em

b er 2 3 , 2 0 1 5 . Pet i t i o ners therefo re were n o ten t i t l edt o d edu ctan y co n tri b u t i o n s m ad e t o i tdu ri ng 2 0 1 2 o r 2 0 1 3 . See s ec. 1 7 0 (c)(2 ). 4

4 Pet i t i on ers i n an y

ev en td i dn o t s ub s t an t i at e t h e al l eg edg i ft s . W e qu es t i o n th e au th en t i ci ty

o f t h e “ recei p t s ” t h atp et it i on er h u s ban ds i g n edi nh is cap aci ty as (co n ti n u ed ...)- 1 4 -

[* 1 4 ] Th e b al an ce o f t h e cl ai m edcas h co n tri b u t i o ns co n s i s t ed o f al l eg edweek l y d o n at i o n s t o “ St . M art i n ’ s Ch u rch .” To s ub s tan t iat e t h es e g i ft s p et i t i on ers s up p l i edn o recei pt o r o th er d o cu m en tfro m the ch u rch , b u to n l y

a s el f-creat eds p read
s h eetl is t i n g th e am o un tan dd at e o f each al l eg edco n tri b u ti o n . W e d o n o tfi n dth i s
s p read s h eett o b e a rel iab l e reco rd , s ee s ec. 1
. 1 7 0 A-1 3 (a)(2 )(i ), In co m e Tax Reg s ., an d we fi n dth ati td o es n o ts ubs t an t i at e t he p u rp o rt edco n tri b ut i o n s . Acco rd i n g ly , we s u st ai n res po n d en t ’ s d i s al l o wan ce o f al l cl ai m ed cas h co n tri b u t i o n s . Pet i t i o ners al s o cl ai m edd edu ct i o n s fo r co n tri b ut i o n s t o Go o dwi l l In du s tri es (Go od wi l l ) o f cl o th i n g an d el ect ro n i c eq u ip m en tv al u edat$ 1 4 ,0 0 0 fo r 2 01 2 an d $ 9 ,2 8 0 fo r 2 01 3 . Th e o n l y ev i d en ce p et it i on ers o ffered t o s ub st an t i at e t h es e g i ft s
was a s el f-p rep areds p read s h eet , a Go o dwi l l “ v al u at i o ng u i d e,” an ds ev eral p art i al l y co m p l et ed Fo rm s 8 2 8 3 . Th e Fo rm s 8 2 8 3 were n ots i g nedb y an y Go o dwi ll
o ffi ci al , an d p et i t io n ers p ro du cedn o recei pt , CWA , o r o th er d o cu m en t fro m Go o d
wi l l ackn o wl ed g i n g an y o f t h es e al l eg edg i ft s. Th e p u rp ort ed d o n at i o n s --i ncl u d in g th ree d o zen s ui t s v al u edup t o $ 6 0 0 ap i ece, t h ree d o zen p ai rs o f b as k etbal l s h o es v al u ed up t o $ 2 8 0 ap i ece, a d ozen wi n ter jack et s , an d1 5 p ai rs o f jean s --are i m p lau s i b l e o n thei r face. Al l i t em s o f

4 (...co n t in u ed ) ch ai rm an o f AM C Fo u n dat i o n . Pet i ti o n ers p ro du ced n o ch eck s, b an k reco rd s , o r CWAs m eet i n g t h e req u i rem en t s o f s ect i o n 1 7 0 (f)(8 )(B).- 1 5 -

[* 1 5 ] cl o th i n g an del ect ro n ic eq u i p m en tm u st b e ag g reg at ed fo r p u rp o s es o f d et erm i n i n g s at is fact i on o f t h e rel ev an ts ub s t an t i at i o n req ui rem en t s . Pet it i o n ers h av e wo efu l ly

fai l ed t o s at i sfy

th o s e req ui rem en t s fo r g ift s o f t h is m ag n i tu d e. See
s ec. 1 7 0(f)(1 1 )(B) an d (C); s ec. 1 .1 70 A-1 3(b )(2 )(i ), (i i )(B), (b )(3 )(i )(A), (c)(2 ), In co m e Tax Reg s . Res p o n d en tal l o wedp et i t i o n ers a d edu ct i o no f $ 2 5 0 fo r n o n cas h co n tri b u t io n s each y ear. W e fi n d n o ju st i fi cat i o n fo r al l o wi ng an ythi n g m o re. B. Un rei m

b urs edEm

p l o y ee Ex p en s es Sect io n 1 6 2 p erm i t s em

pl o y ees t o d edu cto rd i n ary an d n eces s ary

ex pen s es p ai do r i n cu rred i n th e co u rs e o f em p l o y m en t , b u to nl y

t o t h e ex t en tth e em

p l o y ee i s n o ten t i t l edt o rei m

b u rs em en tfro m

h i s o r h er em

p l o y er. See Orv i s v . Co m m i s s i on er, 7 8 8 F.2 d1 4 0 6 , 1 4 0 8 (9 th Ci r. 1 9 8 6), aff’ g T.C. M em o . 1 9 8 4 -5 3 3 ; Lu cas v . Co m m i s s i o n er, 7 9 T.C. 1 , 6 -7 (1 9 8 2 ). Fo r b ot h y ears ati s s u e p et i t i on ers fi l ed Fo rm 2 1 0 6 -EZ, Un rei m

b u rs ed Em

p l o y ee Bu s in es s Ex p en s es . Fo r 2 0 1 2 th ey cl ai m eda d edu ct i o n o f $ 2 3 , 2 8 8 , o f wh i ch $ 9 ,1 58 was fo r t rav el ex p en s es an d $ 1 4 ,1 3 0 was fo r o th er ex p en s es . Fo r 2 0 1 3 th ey cl ai m eda d edu ct io no f $ 1 5 ,2 8 2 , o f wh i ch $ 7 ,9 1 0 w as fo r trav el ex p en s es an d$ 7,3 7 2 was fo r o ther ex p en ses . Th e IRS d is al l o wedal l d edu ct i o n s cl ai m edfo r 2 0 1 2 an d al l b u t$ 90 o f t h e d edu ct i o n s cl ai m edfo r 2 0 13
.- 1 6 -

[* 1 6 ] Al l o f t h e ex p en s es ati s su e were al l eg ed l y co n n ect ed t o p et i t i o n er wi fe’ s
em pl o y m en tatLei d os , wh ere s h e wo rk ed as a s en i o r co m p en sat i o nan al y s t . At tri al s h e t es t i fi edth ath er em p l o y er fu l l y

rei m b u rs edh er fo r al l b u s i n es s trav el ex p en ses . Sh e s tat edth ats h e d i dn o treco g n i ze an y o f t he t ri p s l is t edi nth e m i l eag e l o g s p ro du ced t o s ub st an t iat e t hes e d edu ct i o n s . Pet i t i o ners co n t en dth ats o m e o f t h e ex p en s es at i ss u e were at tri b u t ab l e t o p et i t i o n er wi fe’ s u s e o f a h o m e o ffi ce. Bu ts h e cred i b l y t es t i fi edth ats h e u s edth at
s p ace fo r p ers on al an dfam i l y p u rp o s es , an d t h e Co d e ex p res s l y p ro h i b i t s a h o m e
o ffi ce d edu ct i o n fo r s u ch m i x ed -u s e s p aces . See s ec. 2 8 0 A (c)(1 ). W e acco rd i n g l y
s u s t ai n res p o n den t ’ s d et erm i nat i o ns reg ard i n g d educt i o n s fo r u n rei m bu rs edem p l o y ee b u s i n es s ex p en ses . V. Sel f-Em

p l o ym en tTax es Pet i t i o ners ch al l en g e t he IRS’ d et erm i nat i o nth at p et i t i o n er h u s b an di s l i ab l e fo r s el f-em

p l oym en t t ax es o n h i s wag es fro m the IM F. Sel f-em

p l oym en tt ax es ap p ly t o al l n etearn i n g s fro m

a “ trad e o r b u s i n es s” as d efi n edi ns ect i o n 1 4 0 2
. See s ec. 1 4 0 2 (a), (c) (cro s s -referen ci n g s ec. 1 6 2 ). Sect i o n 1 4 0 2 (c)(2 ) g en eral l y
ex cl u d es fro m

th e d efi n i t io n o f a “ trad e o r b u s i n es s ” s erv i ces p erfo rm edb y a t ax p ay er as an em

p l o y ee. Bu tthi s ex cl u s i o nd o es n otap p l y t o s erv ices p erfo rm edi n- 1 7 -

[* 1 7 ] th e Un i t edSt at es b y an em p l o y ee o f an“ i n t ern at i on al o rg an i zat i o n . ” See
s ec. 1 4 02 (c)(2 )(C) (cro s s -referen ci n g s ec. 3 1 21 (b )(1 5 ) an d(y )). Pet i t i o ner h u s b an d d o es n o td is p u t e t h at h e recei v edwag es fro m th e IM F, as
s h o wno n h i s Fo rm s W -2 , W ag e an dTax St at em en t. No r d o es h e d i s p u t e t h atth e IM F i s an “ i n t ern at i o n al o rg an izat i o n .” See s ec. 7 7 0 1 (a)(1 8 ); Ch i en v . Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -2 7 7 , 1 04 T.C.M
. (CCH) 3 85 , 3 88 . In s t ead , h e as s ert s th ath i s wag es are ex em

ptfro m s el f-em p lo ym en tt ax b ecau s e t h ey were at tri b u t ab l e t o s erv ices th ath e p erfo rm edab ro ad . See s ec. 1 4 0 2 (c)(2 )(C). Th ere i s n o fact u al s up p o rtfo r t h i s as s ert i on . Attri al p et i t i o ner h u s b an d
s up p li edrecei pt s fo r o n e t ri p h e t o o kt o Cam ero o nb y way o f Pari s. Th i s d o cu m en t at i o n d o es n ot es t ab li s h th ath e t o o kth i s tri p i nth e s erv i ce o f t h e IM F o r t h at i t hadan y b u s i n es s p u rp o s e wh at ev er. W e fi n dn o cred i bl e ev i d en ce t h ath e p erfo rm eds erv i ces fo r t h e IM F atan y l o cat i o n o th er t h an h i s o ffi ce i nW as h i n g t o n , D.C. W e t h u s s u s t ai n res p o n den t ’ s d et erm i n at i o nth atp et i t i o n er h u s ban d i s l i ab l e fo r s el f-em

p l oym en t t ax es o n al l wag es h e recei v edfro m th e IM F du ri n g 2 0 1 2 an d 2 0 1 3 . See Ch i en , 1 0 4 T.C.M . (CCH) at 3 88
. VI. Pen al t i es Th e Co d e i m

p os es a 2 0 % p en al ty

o nth e p ort i on o f an y

u n d erp aym en to f t ax at tri b u t ab l e t o “ [n ] eg l i g en ce o r d i s reg ard o f ru l es an d reg u l at i o n s ” o r “ [a] ny s ub
-- 1 8 -

[* 1 8 ] s t an t i al u n d ers t at em en to f i n co m e t ax .” Sec. 6 6 62 (a) an d(b )(1 ) an d (2 ).

“Neg li g en ce i n cl u d es “ an y fai lu re t o m ak e a reas o n ab l e at t em ptt o co m p l y ” wi th th e i n t ern al rev en u e l aws , an d“ d i s reg ard ” i n cl ud es “ an y carel es s , reck les s , o r i n t en t i o n al d i s reg ard .” Sec. 6 6 6 2 (c). An u n d ers t at em en to f i n co m e t ax i s

“ s ub s t an t i al ” i f i tex ceed s th e g reat er o f $ 5 ,0 0 0 o r 1 0 % o f t h e t ax req u i redt o b e
s h o wno n t h e ret u rn . Sec. 6 6 6 2(d )(1 )(A). Un d er s ect i o n 7 49 1 (c) res p o n d en tb ears th e b u rd en o f p ro du ct i o nwi th res p ectt o t h e l i ab i l i ty

o f an i n d i v i du al fo r an y

p en al ty , th ereb y req u i ri n g h i m t o
co m e fo rward wi th s u ffi ci en tev i d en ce i n d i cat i n g th at i m p o s i ti o no f th e p en al ty

i s ap p ro p ri at e. See Hi g b ee v . Co m m i s s i o n er, 1 16 T.C. 4 3 8 , 4 4 6 (2 0 0 1 ). Res p o n d en t h as s at i s fi edh i s b u rd en o f p ro du ct io nas t o n eg l i g en ce b y s h o wi n g th atp et i t i o n ers fai l edt o m ai n t ai n ad equ at e b o o k s an dreco rd s reg ard i n g AM C an dfai l edt o p ro p erl y s ub s tan t i at e th ei r ch ari tab l e co n tri b u t i on s . See s ec. 1 .6 6 62 -3 (b )(1 ), In co m e Tax Reg s . In Graev v . Co m

m is s i o n er, 1 4 9 T.C. _

__ (Dec. 2 0 , 2 0 17 ), s up p l em en t i n g
an d o v erru l i n g i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ), we h el dth atres p o nd en t ’ s b u rd en o f p ro duct i o n u n d er s ect i on 7 49 1 (c) i n cl u d es es t ab l i s h in g co m p l i an ce wi th s ect i o n 6 7 5 1 (b ), wh i ch req u i res th at p en al t i es b e “ p ers o n al l y ap p ro v ed (i nwri t i n g ) b y th e i m m ed i at e s up erv i s o r o f t he i n di v i du al m ak i n g s u ch d et erm i n at i o n.” See Ch ai v .- 1 9 -

[* 1 9 ] Co m

m i s si o n er, 8 5 1 F.3 d1 9 0 , 2 1 7 (2 dCi r. 2 0 1 7 ), aff’ g i np art , rev ’ g i np art T.C. M em o . 2 01 5 -4 2 . Th e reco rdi n cl u d es a co p y o f a Ci v i l Pen al ty

Ap p ro v al Fo rm , ex ecu tedb y

th e i m m ed i at e s up erv i s or o f t h e rev enu e ag en t wh o ex am i n ed p et i t i o n ers ’ 2 0 12 an d2 0 1 3 retu rn s , wh i ch ap pro v edi m p o si ti o no f accu racy -rel at ed p en al t i es ag ai n s tp et i t i o n ers fo r b o th y ears . W e t h u s co ncl u d e t h atres p o n den th as
m eth i s b u rd en o f p ro du ct i o n . Sect io n 6 6 6 4 (c)(1 ) p ro v i d es an ex cep t i on t o the i m po s it i on o f t h e accu racy rel at ed p en al ty

i f t h e t ax p ay er es t ab l i s h es th atth ere was reas o n ab l e cau s e fo r, an d th ath e act edi n go o dfai th wi th res p ectt o , th e u n d erp aym en t . Th e d eci s i o nas t o wh et h er t h e t ax p ay er act edwi th reas o n ab l e cau s e an di ng o o dfai th i s m ad e o n a
cas e-b y -cas e b as i s , t ak in g i nt o acco u n tal l p ert i n en tfact s an dci rcu m s tan ces . See
s ec. 1 .6 6 64 -4 (b )(1 ), In co m e Tax Reg s . Ci rcu m s t an ces th atm ay s i gn al reas o n ab l e
cau s e an d g o o dfai th “ i n cl u d e anh o n es tm i s u nd ers t an di n g o f fact o r l aw t h ati s
reas on ab l e i n l i g h to f al l o f t h e fact s an dci rcu m s tan ces , i ncl u d i n g th e ex peri en ce, kn o wl ed g e, an d educat i o n o f t h e t ax p ay er.” Ib i d
. Pet i t i o ners h av e n o ts h o wnreas o n ab l e cau s e. Th ey p res en t edn o cred i b l e
ev i d en ce t h atan y Sch edu le C ex p en s es were act u al l y p ai d
. Th ey

wo efu l l y fai l ed t o s ub s t an t i at e t h ei r p u rp o rt edch ari t ab l e co n tri b ut i o n s an du nrei m bu rs ed em -- 2 0 -

[* 2 0 ] p l o y ee b u s i n es s ex pen s es . Pet i t i o n er h u s b an d ’ s arg u m en t fo r av o i d i n g p aym en t o f s el f-em

p l o y m en t t ax d i dn o t p as s th e s trai gh t -face t es t. Pet i t i o ners d i dn o ts eek ad v i ce fro m a qu al i fi edt ax p ro fes s i o nal , b u trel i ed
en t i rel y o n t ax p rep arat i o n s o ft ware. Th ats o ft ware “ i s o n ly as g o odas th e i n fo rm at i o n o ne p u ts i n t o i t , ” an di t p ro v i d es n o g en eral d efen s e t o t ax p ay er n eg l i g en ce. See Bu n n ey

v . Co m m i s si o ner, 1 1 4 T.C. 2 5 9 , 2 6 7 (2 00 0 ). W e fi n d t h atp et i t i o n ers
were n eg l i g en ti n p rep ari n g thei r 2 0 1 2 an d2 0 1 3 retu rn s an dth atn o p o rt i o n o f th ei r res p ect iv e u n d erp aym en t s m etth e “ reas o n ab l e cau s e” ex cep t i o n . W e al s o fi n d t h atth e u n d erp aym en t s ati s s u e are at tri b u t ab l e t o s ub s t an t i al
u n d ers t at em en t s o f i nco m e t ax fo r wh i ch reas o n ab l e cau s e h as n o tb een s h o wn . Th e d efi ci en ci es i n p et i t io n ers ’ 2 0 12 an d2 0 1 3 i n co m e t ax , wh i ch we h av e s u s t ai n edi n fu l l , are $ 2 5 ,0 8 3 an d $ 4 9 ,0 2 8 , res p ect i v el y . Th ere b ei n g n o d i s p u t e o v er
an y cl ai m edrefu n d ab l e cred i t s , th os e d efi ci en cy am o u n ts equ al p et i t i o n ers ’ u n d ers t at em en t s o f i n co m e t ax . See g en eral l y Gas s o w ay

v . Co m m i s s i o n er, T.C. M em o . 2 0 1 5 -2 0 3 . Pet i t i o n ers rep o rt edt ax du e o f $ 3 ,9 8 6 an d$ 39 ,3 1 3 o nth ei r 2 0 12 an d 2 0 1 3 retu rn s , res p ect iv el y . Th e d efi ci en cy am o u n t s cl earl y ex ceed b o th $ 5 ,0 0 0
an d 1 0 % o f the am ou n t s req u i redt o b e s h own o nth ei r retu rn s . See s ec. 1 .6 6 6 2
- 4 (b )(3 ), In co m e Tax Reg s . As a res u l t , p et i t i on ers ’ u n d ers t at em en t s o f i nco m e t ax
are s ub s t an t ial wi th in th e m ean i n g o f s ect i o n 6 6 6 2 (d )(1 )(A).- 2 1 -

[* 2 1 ] To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t ered fo r res p o n den t .